1. Financial Services Authority (FSA) is the official regulator of financial services in the United Kingdom. Financial services included banking, securities and insurance. FSA is an incorporated body which is conferred with extensive regulatory powers to regulate financial services in the UK. It is not regarded as acting on behalf of the Crown and therefore its members, officers and staff are crown servants.
2. Although, independent but the Financial Ombudsman Service (FOS) is accountable to the FSA and must make an annual report to the FSA on its activities in accordance with the rules made by the FSA. In short, this empowers the FSA to extract the required information from FOS.
3. The Financial Ombudsman Service Ltd – known as Financial Ombudsman Service (FOS) – is a company established by the FSA under Part 16 of the Financial Services and Markets Act 2000 (herein referred to as ‘FSMA’) and Part 2 of Schedule 17 to the FSMA. As required by Schedule 17, the chairman and board members are appointed (and may be removed) by the FSA, with the approval of the Treasury in the case of the chairman. The board members’ terms of appointment are to secure their independence from the FSA in the operation of the scheme. The board determines the appointment of the Chief Ombudsman (who functions as a Chief Executive) and a panel of Ombudsman (with appropriate qualifications and experience), the making of certain rules of FOS (as to procedure, the levying of case fees and the voluntary jurisdiction), and the approval and recommendation to the FSA of an annual budget (which must be approved by the FSA). The FOS and the Chief Ombudsman must make an annual report to the FSA.
4. The Financial Services Compensation Scheme (FSCS) is designed to compensate eligible complainants where a relevant firm is unable or likely to be unable to meet claims against it.
5. Entitlement to compensation: To be entitled to compensation from the scheme, a claimant must:
i) be an eligible claimant. Broadly, an eligible claimant is defined as a claimant who is not:
· a large company or large partnership/mutual association; or
· an authorised firm, unless it is a sole trader/small business and the claim arises out of a regulated activity of which it has no experience, i.e. does not have permission to carry out; or
· an overseas financial services institution, supranational body, government and local authority.
ii) have a protected claim. Protected investment business means designated investment business, the activities of the manager/trustee of an authorised unit trust and the activities of the authorised corporate director/depositor of an ICVC. These activities must be carried on either from an establishment in the UK or in an EEA by a UK firm which is passporting their services there;
iii) be claiming against a relevant person who is in default. A relevant persons means an authorised firm, except an EEA firm passporting into the UK; and
iv) make the claim within the relevant time limit (normally six years from when the claim arose).
6. Limit of compensation: Maximum compensation level for failures of firms at present is as follows:
Protected investment business: £50,000 (i.e. 100% of the first £50,000)
Protected deposits: £50,000 (i.e. 100% of the first £50,000)
Therefore, first of all, the above legal principles have to be applied to XYZ Investment in order to identify the total number of eligible claimants and then the limit of compensation for each one is to be determined and naturally the final step is to calculate the total liability of the Scheme.
7. These three authorities seek their life, their powers and characteristics from the Financial Services and Markets Act 2000. The FOS get set into motion once a complaint has arisen. Therefore, by its very nature, it cannot be proactive in precluding the complaints. However, it can play a deterrent role. There is nothing that prevents the FOS to provide necessary information to the FSA should it find striking features in the complaints made to it by the consumers of financial services. The FOS has to make a final report to the FSA anyway. The FOS can work expeditiously to resolve the outstanding complaints to help the other two authorities. However, on the other hand the FSCS and the FSA can be proactive in performance of their responsibilities.
8. FSA: The FSA has, at least, two proactive powers. The first power is in relation to the firm’s activities i.e. regarding its authorisation under Part 4 of FSMA and the second is in relation to the firm itself under Part 24 of FSMA.
9. FSA’s powers under Part 4 of FSMA: There are two such powers namely variation and cancellation of authorisation of the firm-in-question.
10. Variation of authorisation under Part 4 of FSMA: The FSA has powers under section 45 of FSMA 2000to vary or cancel an authorised person’s Part IV permission. The FSA may use these powers where, amongst other reasons, the authorised person is failing or is likely to fail to satisfy the threshold conditions or where it is desirable to vary or cancel the authorised person’s Part IV permission in order to protect the interests of consumers or potential consumers.
11. The powers to vary and cancel an authorised person’s Part IV permission are exercisable in the same circumstances. However, the statutory procedure for the exercise of each power is different and this may determine how the FSA acts in a given case. Certain types of behaviour which may cause the FSA to cancel permission in one case, may lead it to vary, or vary and cancel, permission in another, depending on the circumstances.
12. Varying of authorisation on the FSA’s own initiative: The FSA has to have regard to its regulatory objectivesand the range of regulatory tools that are available to it. It will also have regard to:
a) the responsibilities of a firm’smanagement to deal with concerns about the firm or about the way its business is being or has been run; and
b) the principle that a restriction imposed on a firmshould be proportionate to the objectives the FSA is seeking to achieve
13. In the course of its supervision and monitoring of a firmor as part of an enforcement action, the FSA may make it clear that it expects the firm to take certain steps to meet regulatory requirements. However, the FSA may consider exercising its formal powers under section 45 of FSMA 2000 to vary a firm’spermission to ensure such requirements are met, for example where the firm appears to be failing, or appears likely to fail, to satisfy the threshold conditions relating to one or more or all of its regulated activities or where it appears that the interests of consumersare at risk because the firm appears to have breached any of Principles6 to 10 of the FSA’s Principles to such an extent that it is desirable that limitations, restrictions, or prohibitions are placed on the firm’s regulated activity.
14. Use of the own-initiative power in urgent cases: The FSA may impose a variation of permission so that it takes effect immediately or on a specified date if it reasonably considers it necessary for the variation to take effect immediately (or on the date specified), having regard to the ground on which it is exercising its own-initiative power. The FSA may consider exercising its own-initiative power as a matter of urgency where:
a) the information available to it indicates serious concerns about the firm or its business that need to be addressed immediately; and
b) circumstances indicate that it is appropriate to use statutory powers immediately to require and/or prohibit certain actions by the firm in order to ensure the firm addresses these concerns,
for example, where there is information indicating significant loss, risk of loss or other adverse effects for consumers, where action is necessary to protect their interests.
15. Cancelling a firm’s Part IV permission on its own initiative:
The FSA can consider cancelling a firm’s Part IV permissionusing its own-initiative powers contained in sections 45 and 47 of FSMAin two main circumstances:
(a) where the FSA has very serious concerns about a firm, or the way its business is or has been conducted; or
(b) where the firm’s regulated activities have come to an end and it has not applied for cancellation of its Part IV permission.
16. The grounds on which the FSA may exercise its power to cancel an authorised person’s permission under section 45 of FSMAare the same as the grounds for variation. Examples of the types of circumstances in which the FSA may cancel a firm’s Part IV permission include but are not limited to:
(a) non-compliance with a Financial Ombudsman Serviceaward against the firm;
(b) failure to have or maintain adequate financial resources, or a failure to comply with regulatory capital requirements;
(c) non-payment of FSA fees or repeated failure to pay FSA fees except under threat of enforcement action; and
(d) repeated failures to comply with rules or requirements;
(e) a failure to co-operate with the FSA which is of sufficient seriousness that the FSA ceases to be satisfied that the firmis fit and proper, for example failing without reasonable excuse to:
· comply with the material terms of a formal agreement made with the FSA to conclude or avoid disciplinary or other enforcement action; or
· provide material information or take remedial action reasonably required by the FSA.
17. Section 45(2A) of FSMA sets out further grounds on which the FSA may cancel the permission of authorised persons which are investment firms.
18. Depending on the circumstances, the FSA may need to consider whether it should first use its own-initiative powers to vary a firm’s Part IV permission before going on to cancel it. Amongst other circumstances, the FSA may use this power where it considers it needs to take immediate action against a firm because of the urgency and seriousness of the situation.
19. Where the situation appears so urgent and serious that the firm should immediately cease to carry on all regulated activities, the FSA may first vary the firm’s Part IV permission so that there is no longer any regulated activity for which the firm has Part IV permission. If it does this, the FSA will then have a duty to cancel the firm’s Part IV permission once it is satisfied that it is no longer necessary to keep the Part IV permission in force.
20. However, where the FSA has cancelled a firm’s Part IV permission, it is required by section 33 of FSMA to go on to give a direction withdrawing the firm’s authorisation. Accordingly, the FSA may decide to keep a firm’s Part IV permission in force to maintain the firm’s status as an authorised person and enable the FSA to monitor the firm’s activities. An example is where the FSA needs to supervise an orderly winding down of the firm’s regulated business. Alternatively, the FSA may decide to keep a firm’s Part IV permission in force to maintain the firm’s status as an authorised person to use administrative enforcement powers against the firm. This may be, for example, where the FSA proposes to impose a financial penalty on the firm under section 206 of the Act.
FSA’s powers under Part 24 of FSMA
21. Part 24 of FSMA confers a range of powers on the FSA to deal with situations where customers are at risk because a financial services business has or is likely to become insolvent. In theory, consumers often have their own rights to take action against the business in these circumstances but may lack the knowledge or financial resources to do so. There are, for example, provisions entitling the FSA to petition for winding up even when it is not itself a creditor, together with a right to be notified of and heard in insolvency proceedings initiated by others.
22. Winding up: Under section 367 of the FSMA, the FSA may petition for the winding up of any company or partnership which is or has been an authorised person or appointed representative. The grounds on which the court may grant the petition are either that the body is unable to pay its debts (as defined in the Insolvency Act 1986), or that the court is of the opinion that it is just and equitable that it should be wound up. A body is deemed to be unable to pay its debts if it has failed to pay a sum due under an agreement where the making or performance of that agreement is or is part of a regulated activity.
Powers of FSCS
23. The compensation scheme is independent, but accountable, to the FSA and HM Treasury for its operations and works in partnership with the FSA in delivering the FSA’s objectives, particularly that of consumer protection.
24. Section 218A- The FSA may make rules enabling it to require authorised persons to provide information, which may then be made available to the FSCS manager by the FSA. A requirement may be imposed only if the FSA thinks the information is of a kind that may be of use to the FSCS manager in connection with function is respect of the compensation scheme. A requirement under this section may apply to authorised persons generally or only to specified persons or classes of person and to the provision of information at specified periods, in connection with specified events or in other ways. In addition to requirements under this section, a notice under section 165 may relate to information or documents which the FSA thinks are reasonably required by the FSCS manager in connection with the performance of functions in respect of the compensation scheme.
25. Section 219- Under this section the compensation scheme manager may, by notice in writing require a firm to provide specified information or information of a specified description or to produce specified documents or documents of a specified description. A requirement may be imposed on a person who is unable or likely to be unable to satisfy claims under the scheme against him. The information or documents must be provided or produced before the end of such reasonable period as may be specified and in the case of information in such manner or form as may be specified. This section applies only to information and documents the provision or production which the compensation scheme manager considers to be necessary or likely to be necessary for the fair determination of claims which have been or may be made against the person. If a person who is required under this section to produce a document fails to do so, the scheme manager may require the person to state, to the best of his knowledge and belief where the document is.
26. One of the statutory objectives of the FSA is consumer protection. To meet this objective, FSMA provides it with certain tools of which some are stated above, under the FSMA the FSA was made responsible to establish to: a) a Compensation Scheme, and b) an Ombudsman Service. The three authorities are inter-connected and inter-dependant to certain extent but their independence is also ensured. This overall working structure of these three bodies is designed to protect consumers’ interest. Consumer protection often requires proactive steps to be taken which the FSA and the FSCS may take. The FOS may with work alongside these two bodies in furtherance of the overall aim of consumer protection.