4â Financial Services Compensation Scheme

The Financial Services Compensation Scheme (FSCS) was created to compensate customers who have suffered loss as a consequence of the inability of an authorised person to meet its liabilities. However, it should be noted that the FSCS is not intended to compensate people where a regulatory breach has occurred. Under FSMA 2000, section 213, customers may make a claim against an authorised person even if the claim arises in relation to an activity for which the authorised person did not have permission under the FSMA 2000. In respect of lost deposits, an eligible depositor with a bank is entitled to claim up to £85,000, with joint account holders able to claim £85,000 each.44

5â Financial Ombudsman Scheme

Under Part XVI of the FSMA 2000, a single compulsory Ombudsman scheme has been created with the aim of solving disputes between authorised firms and their customers. Under section 226, all firms that are authorised by the FSA are required to submit to the jurisdiction of the scheme.45 The FSA is empowered to make rules to determine which activities of authorised persons fall within its jurisdiction. If a claim against an authorised person is upheld, the respondent may be ordered to pay compensation up to a maximum amount set by the FSA.46 Furthermore, the Ombudsman may recommend an amount exceeding the limit as fair compensation and the respondent may also be ordered to take such steps as are necessary to rectify the matter complained of.47 Under section

230, the scheme operator has the ability to create rules regarding costs that can be awarded by the Ombudsman.

6â Financial Services and Markets Tribunal

The Financial Services and Markets Tribunal is an independent tribunal established by section 132 of the FSMA 2000, and it has been described as one of the

42 FSMA 2000, s.166(2).

43 See, e.g., N. Ryder, ‘The Financial Services Authority and Proceeds of Crime Act; too little too late?’ (2010) Financial Regulation International (September) 8–9.

44 For more information on this, see www.FSCA.org.uk.

45 The scheme’s compulsory jurisdiction may only be applied to persons who were authorised at the time the activity to which the complaint relates was carried out, and the rules must have been in force at the time.

46 FSMA 2000, s.229.

47 This can be enforced through the courts by the complainant if necessary.

Act’s key features.48 Its role is to provide an impartial review mechanism of the decisions made by the FSA, including, for example, decisions:

(a)to discipline authorised firms and approved persons;49

(b)to vary a firm’s permission to conduct certain or all regulated activities;

(c)relating to market abuse;50

(d)to withdraw individual approval, and

(e)to make prohibition orders banning people from employment relating to certain or all regulated activities.

The Tribunal may either uphold the decision of the FSA, instruct the FSA not to take any action, or direct them to take a different enforcement action, and it may make recommendations on the FSA’s regulatory measures and requirements. The operation and procedure of the Tribunal is regulated by the Financial Services and Markets Tribunal Rules 2001.51 The Tribunal may give a direction regarding the running of the case, which may be granted at any time during the hearing and could apply, for example, to the time limits, disclosure of certain documents and the suspension of an FSA notice. The hearings before the Tribunal are normally held in public unless there are valid reasons for it to direct otherwise and its decision may be overturned where an error has been made by the Tribunal’s staff or additional evidence has been presented.52 A party to a case may appeal on a point of law to the Court of Appeal.

7â The Bank of England

As referred to in Part 6 Chapter 2, the Bank of England is the United Kingdom’s central bank. It was established in 1694, nationalised in 1946 and gained selfdetermination in 1997.53 The Bank of England has two primary or ‘core’ objectives: monetary stability and financial stability. Monetary stability includes maintaining steady prices and confidence in sterling, whilst financial stability requires the Bank of England to identify and reduce the threats posed to the UK financial system. In order to achieve its objectives the Bank of England works with other central banks, international organisations such as the World Bank

48P. Bourke, and A. Henderson, ‘The first decision of the Financial Services and Markets Tribunal’ (2002) 23(12) Company Lawyer 381.

49See in particular Editorial ‘Case comment: Financial Services and Markets Tribunal rules on applications for authorisation and approved person status’ (2005) 13(3) Journal of Financial Regulation and Compliance 278.

50See, e.g., J. Gray, ‘Case comment: first market abuse ruling from Financial Services and Markets Tribunal’ (2005) 13(3) Journal of Financial Regulation and Compliance 272.

51SI 2001/2476.

52For a more detailed discussion of this see S. Orton, ‘When will hearings of the Financial Services and Markets Tribunal be held in private’ (2003) 18(3) Journal of International Banking Law and Regulation 141.

53Bank of England, ‘About the bank’, available at www.bankofengland.co.uk/about/index.htm. See Bank of England, ‘Core purposes’, available at www.bankofengland.co.uk/about/corepurposes.

and IMF, HM Treasury and the FSA. The Bank of England has nine areas of strategic priority:54

(1)to keep inflation on track to meet the 2 per cent target;

(2)to ensure the Bank has the policies, tools and infrastructure in place to implement monetary policy and issue banknotes;

(3)to sustain public support for the monetary policy framework and the benefits of low inflation;

(4)to maintain stability and improve the resilience of the financial system;

(5)to develop the framework and instruments for the Bank’s role in macroprudential policy, operating through the Financial Policy Committee (FPC);

(6)to prepare for the transition to the Bank of responsibility for microprudential supervision (through the Prudential Regulation Authority) and infrastructural oversight;

(7)to build and sustain public support for the microand macroprudential frameworks;

(8)to ensure that the Bank of England has the correct people and processes to carry out its core purposes; and

(9)to promote public trust and confidence in the Bank’s activities.

The regulatory function of the Bank of England was fundamentally altered by the Bank of England Act 1998. The Act removed the Bank of England’s regulatory and supervisory functions and transferred them to the FSA,55 but it conferred the management of monetary policy on the Bank’s Monetary Policy Committee (MPC). Further changes to the regulatory role of the Bank of England were made by the Banking Act 2009, including the Bank being given a statutory objective of financial stability,56 the creation of the Financial Stability Committee57 and the Bank of England being given supervisory control over the inter-bank payment systems.58

8â Bank insolvency

In light of the impact of the ‘credit crunch’, the former Labour government deemed it necessary to introduce new measures to deal with bank insolvency. The Banking Act 2009 deals with banks experiencing financial problems by capturing the complex set of risks of a bank in distress, in order to minimise the consequences of a bank failure for the financial system as a whole and to compensate depositors as efficiently as possible.59 It is important to note that the Banking Act 2009 is very different from its predecessors in that it deals

54 See Bank of England, ‘Core purposes’, available at www.bankofengland.co.uk/about/ corepurposes.

55 Bank of England Act 1998, s.21.â 56â Banking Act 2009, s.238.

57 Ibid.â 58â Ibid. s.181.

59See generally D. Singh, ‘The UK Banking Act 2009, pre-insolvency and early intervention: policy and practice’ (2011) 1 Journal of Business Law 20.

with banking failure.60 The Act ‘adds the new banking insolvency and banking administration respectively to the existing Insolvency Act 1986’.61 Singh noted that the ‘existing insolvency regime was considered inadequate to deal with a bank in distress, albeit that it has been used on a number of occasions with relative success’.62 The 2009 Act ‘strengthen[ed] the statutory framework for financial stability and depositor protection; it introduces new insolvency and administration regimes for banking companies’.63 The Act introduced the Special Resolution Regime,64 a new bank insolvency procedure involving the making of a ‘bank insolvency order’ 65 and a new bank administration procedure for use where there has been a partial transfer of business from a failing bank.66 The Special Resolution Regime ‘is designed to address some or all of the business of a bank that is likely to encounter difficulties’.67 The Banking Act 2009 provides that the Special Resolution Regime will be utilised ‘where all or part of the business of a bank has encountered, or is likely to encounter, financial difficulties’.68 The Act also empowers the authorities to use one of three stabilisation options,69 the bank insolvency procedure70 and the bank administration procedure.71 The three stabilisation options are transfer to a private sector purchaser,72 transfer to a bridge bank73 and transfer to temporary public ownership.74 The Special Resolution Regime has five objectives:

(1)to protect and enhance the stability of the financial systems of the United Kingdom;75

(2)to protect and enhance public confidence in the stability of the banking systems of the United Kingdom;76

(3)to protect depositors;77

(4)to protect public funds;78 and

(5)to avoid interfering with property rights in contravention of an ECHR right.79

The 2009 Act has given the financial regulators more power to intervene in a bank’s operation. It enables the authorities to step in much more quickly to rescue a troubled institution, for instance, through temporary nationalisation or selling it on to a rival, because the authorities have realised they need triggers to cut in earlier after the Northern Rock debacle.80 The Banking Act 2009

60M. Hsiao, ‘Legitimised interference with private properties: Banking Act 2009’ (2010) 25(5)

Journal of International Banking Law and Regulation 227.

61 Ibid.â 62â See Singh, above n. 59, at 21.

63Editorial ‘Banking Act 2009 introduces new bank insolvency/administration procedures’ (2009) 247 Company Law Newsletter 5.