What is the effect of the Financial Services Act 1986 on investment businesses?
The Financial Services Act 1986 is one of the more complex pieces of legislation of the 1980s. Before setting out some of the Act’s provisions one cannot do better than quote the preamble of the Act:
An Act to regulate the carrying on of investment business; to make related provision with respect to insurance business and business carried on by friendly societies; to make new provision with respect to the official listing of securities; offers of unlisted securities; takeover offers and insider dealing; to make provision as to the disclosure of information obtained under enactments relating to fair trading, banking companies and insurance; to make provision for securing reciprocity with other countries in respect of facilities for the provision of financial services; and for connected purposes.
The Act represents a comprehensive regulation of investment business and a complete review of existing legislation. The first piece of legislation in this area was the Prevention of Fraud (Investments) Act 1939. That Act provided that it was an offence to carry on the business of dealing in securities without a licence unless exempt. This Act (with amendments) was consolidated into the Prevention of Fraud (Investments) Act 1958.
The Labour government of 1977 announced its intention to review the 1958 Act and published a consultative document.
In 1979 there was a change of government and thus a change of approach to aspects of life. Professor L C B Gower (a company lawyer) was appointed by the Secretary of State for Trade and Industry to undertake a review of the law on investor protection “based so far as possible on self-regulation subject to government surveillance”. The government then issued a White Paper in January 1985 adopting the major recommendations of Professor Gower’s report. The main principle of the Act is the requirement that a person be authorised or exempted in order to carry on investment business. Sections 3 and 4 of the Act provide that it is a criminal offence to carry on investment business without authorisation. A person who does so without authority is liable:
(a) on conviction on indictment to imprisonment for a term not exceeding two years, or to a fine or both;
(b) on summary conviction to imprisonment for a term not exceeding six months, or to a fine not exceeding the statutory maximum or both. Section 5 provides that, in general, contracts entered into by an unauthorised person are unenforceable against the client dealing with that unauthorised person.
The emphasis of this main principle is on authority; there need be no fraud, unfairness or unconscionability for the relevant sections to come into play.
Part I of the Act is designed to regulate investment business, which is wider in scope than the scheme of the 1958 Act. This covered only dealing in securities. The Secretary of State for Trade and Industry is responsible for the supervision of the scheme of investment protection, but has delegated most of his responsibilities to the Securities and Investments Board Ltd (SIB), the designated agency under the Act. This is a limited company and not a governmental agency. It is financed by a levy on self-regulating organisations (SROs) and recognised professional bodies (RPBs)
The SIB recognises directly some businesses for investment business and also recognises the SROs and RPBs, which themselves authorise businesses for investment.
SROs are as follows:
- SFA (the Securities and Futures Authority) which is made up of members of the Stock Exchange, market makers, brokers and those working in the futures and options markets;
- IMRO (the Investment Managers’ Regulatory Organisation) which is made up of managers of large investment portfolios;
- LAUTRO (the Life Assurance and Unit Trust Regulatory Organisation) which is concerned with the marketing of life assurance and unit trusts;
- FIMBRA (the Financial Intermediaries, Managers and Brokers Regulatory Association) which concerns itself with the selling of investment services.
RPBs are as follows:
- The Institutes of Chartered Accountants of England and Wales, Scotland and Ireland,
- The Association of Certified Accountants,
- The Law Society,
- The Institute of Actuaries,
- The Insurance Brokers Registration Council.
These bodies are responsible for regulating investment business within their areas, but subject to supervision by the SIB. The SIB has its own rulebook as do the SROs and RPBs. These encompass principles of fairness, skill and diligence and stipulate minimum financial resources. To carry on investment business a person must be authorised by the SIB or be a member of an SRO or be a member of an RPB or be a “Euro person” authorised for investment purposes under the law of another member state of the EC, or be the operator of an EC-wide collective investment scheme authorised in a member state, or be an authorised insurance company under the Insurance Companies Act 1982 (though for the selling and dealing in unit trusts they might need separate authorisation from LAUTRO) or be a registered friendly society. Certain bodies are exempted.
The more important exempted bodies are Lloyd’s of London, the Bank of England, RIEs (recognised investment exchanges, cleared by the SIB), and RCHs (recognised clearing houses, cleared by the SIB).
Since the scheme of the Act is supervised, self-regulation SROs and RPBs have wide disciplinary powers over their members. There are criminal sanctions in respect of certain activities, eg making misleading statements or forecasts or advertising an investment business when an unauthorised person, and the Act also enables the SIB to apply to court for injunctions against firms breaking the rules and for restitution orders in favour of injured persons.
To be within the scope of the Act the activity in question must be concerned with an investment, defined as follows:
(1) stocks and shares;
(2) debentures, loan stock, bonds, and certificates of deposit;
(3) loan stock, bonds, and other documents of indebtedness to Government or to local authorities or to public authorities;
(4) warrants or other instruments entitling the holder to subscribe for any of the above;
(5) certificates respecting any of the above;
(6) unit trusts;
(7) options to acquire (among other things) investments, currency, gold or silver;
(8) futures;
(9) contracts for differences;
(10) long-term insurance contracts;
(11) rights and interests in investments.
In addition there must be an element of “business”. The following activities are encompassed in the term “business”: dealing in investments, arranging deals in investments, managing investments, giving investment advice and establishing collective investment schemes. In addition to the criminal sanctions and powers of the SIB referred to above, the SIB may petition to wind up an authorised person on the ground that it is unable to pay its debts or that it is “just and equitable” that it should be wound up.
The SIB is also empowered to investigate the affairs of a person carrying on an investment business. Such an investigation will generally be instigated at the request of the SRO or RPB of which the person is a member. Following the investigation various actions may result:
(1) application may be made to the court for the appointment of a provisional liquidator and the winding-up of the company;
(2) application for the disqualification of directors;
(3) prosecution by the Serious Fraud Office, the Department of Trade and Industry or the Crown Prosecution Service;
(4) regulatory action by the Department of Trade and Industry or the SRO.
Part II of the Act adapts the rules on investment business to the life assurance industry where life assurance is used as an investment. Part III of the Act adapts the rules similarly to registered friendly societies. Part IV of the Act relates to the official listing of securities on the Stock Exchange. These provisions repeal the relevant provisions of the Companies Act 1985 and provide for a more extensive statutory remedy where investors rely on misleading particulars. Part V of the Act deals in a similar way with unlisted securities, eg securities listed on the Unlisted Securities Market. This part of the Act is not yet in force.
Other provisions in the Act amend the law on takeovers and on insider dealing and also allow for reciprocal arrangements with other countries that have made provision for the regulation of investment business comparable with the standards of the UK.
So far as staff of firms concerned with investment business are concerned they should ensure that there is proper staff instruction and clear operating methods which should be regularly monitored. Section 202 of the Act makes it clear that, in addition to offences being committed by firms, offences may also be committed by any director, manager, secretary, or other officer or a controller of the body corporate. If the offence is committed by a partnership, then a partner may be guilty, and if it is committed by any other unincorporated association, then any officer of that association (or member of the governing body) may be convicted of the offence in question.
Corrigendum
Accumulation trusts [1] 41 EG 148 Owing to a typographical transposition the paragraph headed “Power of maintenance” at the bottom of the second column was reproduced half way down the third column. Please substitute the following for the second “Power of maintenance”.
Power of investment
It is almost invariable for a settlor to require the settlement to contain an investment clause in very wide terms. Trustees have wide investment powers under the Trustee Investments Act 1961. In practice, however, these powers are considered to be very inconvenient. They require the trust fund to be divided in a complicated manner and require a higher proportion of the fund to be kept in gilt-edge securities than many professional advisers consider desirable.
