SERVICES AND MARKETS ACT: THE WAY AHEAD
On 18 July the
Economic Secretary announced a target of about a year's time for the
coming into force of the Financial Services and Markets Act (known
as 'N2'). There will be a further announcement on timing before Christmas.
This note sets out what will happen in the next year.
Go to the list of Secondary
2. The Financial
Services and Markets Act (FISMA) received Royal Assent on 14 June
2000. It provides the framework for completing the modernisation of
financial services regulation announced by the Chancellor in May 1997.
The Act provides the framework within which a single regulator for
the financial services industry, the Financial Services Authority
(FSA), will operate. An explanation of the Act is contained in an
annex to a Treasury press release
of 18 July.
What Needs to be Done in the Next Year
3. There are three
main strands to bringing FISMA into force. The Treasury, the FSA and
the financial services industry have primary responsibility for one
4. First, the
Treasury must make secondary legislation within the framework provided
by FISMA to:
the scope of the new regulatory system. This includes key instruments,
such as the Regulated Activities Order (RAO), which will determine
exactly which investments and activities will be subject to FSA
regulation, and the new framework for financial promotion.
- make detailed
provision in those areas in which new policy was set out under FISMA,
for example designating the markets and investments which will be
covered by the new market abuse regime.
- make new provision
for matters which are dealt with in legislation which will be repealed,
such as the control of the transfers of banking and insurance companies.
- provide a
coherent transition from the existing to the new regime. Issues
such as how firms will be "grandfathered" into the new regime will
need to be established:
5. A list is attached
of the statutory instruments
currently expected to be required before FISMA can come into force.
Separate statutory instruments will be laid in order to commence the
different sections of the Act.
6. Second, the
FSA must replace the nine existing regulators. This requires :
- an institutional
framework. The existing regulatory bodies need to be wound up, a
single ombudsman and compensation scheme established and so on.
Much of this is already well under way;
- the single
FSA handbook for the financial services industry to be finalised.
Progress on this was outlined on 18 July by Howard Davies.(go to
for the "grandfathering" of firms authorised under existing legislation.
7. Third, firms
which will be regulated by the FSA will need to adapt their systems
and ensure their staff are clear, with training where appropriate,
about the new rules. The Treasury and the FSA will seek to assist
this process. The target of about one year's time for N2 was set in
accordance with industry views. There has been, and will continue
to be, extensive consultation on the secondary legislation and on
the FSA's draft handbook. We aim to provide around four months between
when the FSA's handbook is finalised and N2. We are also open to invitations
to address industry conferences and training courses to explain the
new regulatory system.
8. Setting a target
of about a year gives all concerned a framework within which to make
proper preparations. Broadly speaking, the three strands set out above
need to be completed in sequence, though they do involve overlapping
9. At this stage
we propose to go out to consultation on the Orders setting out the
scope of the new system, and the transitional provisions relevant
to regulated firms, in early autumn and, depending on the results
of consultation, to have laid final versions of these Orders as soon
as possible in the New Year. Once laid this will allow the FSA to
finalise its handbook, which in turn will enable the financial services
industry to have certainty about what the details of the new regime
will comprise. Preparation of the other statutory instruments will
take place in the autumn and winter with the intention that all the
secondary legislation necessary for N2 should be made during the first
half of 2001.
10. The Treasury
consulted widely both before and during the Parliamentary passage
of FISMA. We believe the Act benefited from consultation. We have
also already consulted at least once on important pieces of secondary
legislation, including the RAO, the Financial Promotion (Exemptions)
Order and the investments and markets to which the market abuse provisions
will apply. Many parts of the FSA's Handbook are also available in
draft and the FSA's press release of 18 July referred to above contains
11. We will continue
to take a consultative approach in preparing the secondary legislation
for N2. As noted above, we intend to consult, or re-consult, on the
RAO, Financial Promotion and related Orders. We intend to produce
a consultation paper on our policy on mortgage regulation in September.
We will also be looking to consult practitioners and others with
a material interest on drafts of all other pieces of secondary legislation
which lay down new requirements or involve significant changes to
12. It is not
possible at this stage to give a precise timetable for when we will
be consulting on these draft instruments. We expect to make the secondary
legislation during the first half of 2001 and to do so in broadly
the following order:
which enables the FSA and the financial services industry
- to complete their preparations before N2. This group includes
the Orders on regulated activities and financial promotion, and
many of the transitional provisions.
which will be required at or before N2, for example on
- permissions to undertake regulated activities and on the Financial
Services and Markets Tribunal.
which will not be required before N2, for example on
We intend to issue
a draft of the transitional provisions relevant to regulated firms,
including grandfathering and authorisations, at the time we publish
the next draft of the RAO and Financial Promotion Orders.
documents will be available on this website. We will also post regular
bulletins setting out which pieces of secondary legislation are currently
open for consultation. The FSA will also continue to consult widely.
on the way ahead can be addressed to Justin Wray at HM Treasury
(020 7270 4895) and Vernon Everitt at the FSA press office
(020 7676 3230)