AUTH Authorisation (to see AUTH derivations and destinations tables, go to Useful links)

Part

AUTH Authorisation (to see AUTH derivations and destinations tables, go to Useful links)

Printed on: 01/11/2024

Rulebook at: 01/01/2005

Chapters

AUTH 1 Introduction to the Authorisation manual
AUTH 2 Authorisation and regulated activities
AUTH 3 Applications
for Part IV permission
AUTH 4 Authorisation
Fees
AUTH 5 Qualifying for authorisation under the Act
AUTH 6
Approved
persons
AUTH 7 Periodical publications, news services and broadcasts: applications
for certification
AUTH 8 Determining applications
AUTH App 1 Appendix 1. Financial promotion and related activities
AUTH App 2 Meaning of open-ended investment company
AUTH App 3 Guidance on the scope of the regulated
activity of issuing e-money
AUTH App 4 Guidance on regulated activities connected with mortgages
AUTH App 5 Guidance on Insurance Mediation Activities
AUTH App 6 Guidance on the Identification of Contracts
of Insurance
Transitional Provisions and Schedules

AUTH 1

Introduction to the Authorisation manual

AUTH 1.1

Application and purpose

01/12/2004

Application

AUTH 1.1.1

This manual applies to:

(1) a person which is considering carrying on activities in the United Kingdom which may fall within the scope of the Act and is seeking guidance on whether it needs to be an authorised person;

(2) a person which seeks to become an authorised person under the Act and which is, or is considering, applying to the FSA for Part IV permission to carry on regulated activities in the United Kingdom;

(3) an EEA firm, a Treaty firm or a UCITS qualifier that wishes to establish a branch or provide cross-border services into the United Kingdom using EEA rights, Treaty rights or UCITS Directive rights, or apply for a top-up permission;

(4) a candidate for approval under Part V of the Act, but only in respect of AUTH 6 (Approved persons), which is of general relevance, and AUTH 8 (Determining applications); and

(5) persons generally.

03/09/2001

Purpose

AUTH 1.1.2

The purpose of:

(1) authorisation is to allow only persons which satisfy the necessary conditions (relating, for example, to adequate resources and suitability - see COND) to engage in a regulated activity; and

(2) approval of persons (generally individuals) is to seek to ensure that only fit and proper persons perform controlled functions in the financial services industry.

03/09/2001

AUTH 1.1.3

The purpose of this manual is to give guidance about:

(1) the circumstances in which authorisation is required, or exempt person status is available, including guidance on the activities which are regulated under the Act and the exclusions which are available; see AUTH 2 (Authorisation and regulated activities);

(2) the procedures by which a person can apply for, or obtain, permission under the Act to carry on these regulated activities and become an authorised person and any fees payable; see AUTH 3 (Applications for Part IV permission), AUTH 4 (Authorisation Fees) and AUTH 5 (Qualifying for authorisation under the Act).

(3) the procedures by which a person seeking to become an authorised person can obtain approval for persons to perform controlled functions under the approved persons regime; see AUTH 6 (Approved persons); and

(4) the FSA's powers in relation to authorisation and how it will use them (see AUTH 3 and AUTH 5), including a summary of how applications will be determined; see AUTH 8 (Determining applications).

18/10/2001

AUTH 1.2

Introduction

01/12/2004

AUTH 1.2.1

(1) The Financial Services and Markets Act 2000 (the Act) is the UK legislation under which bodies corporate, partnerships, individuals and unincorporated associations are permitted by the FSA to carry on various financial activities which are subject to regulation (referred to as regulated activities).

(2) The activities which are regulated activities are specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the Regulated Activities Order): for example, accepting deposits, managing investments, effecting contracts of insurance, dealing in investments as agent. In general terms, a regulated activity is an activity, specified in the Order, carried on in relation to one or more of the investments specified in the Order. AUTH 2 gives further guidance on regulated activities and specified investments.

03/09/2001

AUTH 1.2.2

In order to carry on a regulated activity in the United Kingdom, or even "purport to do so", section 19 of the Act (The general prohibition) provides that a person must be either authorised under the Act (an authorised person) or exempt from its provisions (an exempt person). In this context, a "person" includes both a legal person, for example a body corporate, and a natural person, that is, an individual.

03/09/2001

AUTH 1.2.3

Exempt persons are persons falling within the following groups:

(1) an appointed representative;

(2) a person, or class of persons, specified in secondary legislation; for example, the Bank of England is specified in the Financial Services and Markets Act 2000 (Exemption) Order 2001 (the Exemption Order);

(3) a recognised investment exchange or a recognised clearing house (for more information on being a recognised body see REC).

Further information on exempt persons is given in AUTH 2.10 (Persons carrying on regulated activities who do not need authorisation).

21/02/2002

AUTH 1.2.4

Members of the Society of Lloyd's are not required to obtain authorisation to carry out certain insurance market activities unless so directed by the FSA (see AUTH 2.10.9 G ). In addition, certain professional firms (solicitors, accountants and actuaries) are allowed under Part XX of the Act (Provision of Financial Services by Members of the Professions) to carry on certain regulated activities without authorisation subject to their complying with specified conditions (see AUTH 2.10.12 G and PROF).

03/09/2001

AUTH 1.2.5

Before any person carries on in the United Kingdom, by way of business, activities that are regulated activities, it will generally need to be an authorised person (see AUTH 2.2 ). There are two main kinds of authorised person under the Act: a person who is authorised because it has a Part IV permission (see AUTH 1.2.5 G (2)) and a person which qualifies for authorisation (see AUTH 1.2.5 G (1)). It is important that a person considering carrying on a regulated activity in the United Kingdom determines which type of authorisation is required.

(1) A person from another EEA State which is authorised in its Home State may be entitled to establish a branch in, or provide cross border services into, the United Kingdom under the Single Market Directives, the Treaty or the UCITS Directive (this is often known as passporting). The process by which that person can qualify for authorisation under Schedules 3, 4 and 5 to the Act is described in AUTH 5 .

(2) Other persons wishing to carry on regulated activities in the United Kingdom must obtain permission from the FSA under Part IV of the Act (this is known as Part IV permission). Such persons will become authorised persons if the FSA gives them permission. AUTH 1.6 outlines the process of applying for Part IV permission, the formal elements are described in more detail in AUTH 3. At the same time, the applicant will need to apply for certain persons to become approved persons (see AUTH 6).

03/09/2001

AUTH 1.2.6

(1) Electronic commerce activities, other than insurance business falling within the scope of the Insurance Directives, carried on by an incoming ECA provider are excluded from being regulated activities. The provider does not require authorisation if it does not carry on any other regulated activities in the United Kingdom (see AUTH 2.9.18 G ).

(2) An outgoing ECA provider providing electronic commerce activities that are regulated activities from an establishment in the United Kingdom is regarded as carrying on such activities in the United Kingdom regardless of whether they are provided to an EEA ECA recipient or a UK ECA recipient (see AUTH 2.4.3 G (5) ). The provider should be authorised before it starts providing the services.

(3) ECO sets out rules and guidance that apply to both incoming and outgoing ECA providers.

21/08/2002

AUTH 1.3

The Authorisation manual

01/12/2004

AUTH 1.3.1

(1) The Authorisation manual (AUTH), the Supervision manual (SUP), the Enforcement manual (ENF) and the Decision making manual (DEC) form the Regulatory Processes part of the Handbook.

(2) AUTH sets out the relationships between the FSA and applicants for Part IV permission and persons wishing to exercise EEA rights, Treaty rights or UCITS Directive rights. SUP sets out the relationship between the FSA and authorised persons (referred to in the Handbook as firms). As a general rule, material that is of continuing relevance after authorisation is in SUP.

(3) ENF describes the FSA's enforcement powers under the Act and sets out its policies for using these powers.

(4) DEC is principally concerned with, and sets out, the FSA's decision making procedures for decisions that involve the giving of statutory notices.

03/09/2001

AUTH 1.3.2

The procedures for applying for Part IV permission, for approval of a person under section 59 of the Act and for qualifying for authorisation under Schedules 3, 4 and 5 to the Act are derived from the Act. AUTH gives guidance on the Act and the FSA's procedures. It also contains directions to applicants on the manner of making applications (see AUTH 3.9.3 D and AUTH 6.3.2 G) and rules on fees (see AUTH 4 (Authorisation fees)).

18/10/2001

AUTH 1.3.3

(1) A Reader's Guide gives an introduction to the Handbook and is a key navigational aid for Handbook users. The guide explains the format, layout and workings of the Handbook, including the status and definitions of its components such as directions, rules and guidance (see paragraphs 18 to 31 of the Guide).

(2) We recommend that readers consult this Guide before or while reading AUTH. In particular, readers may find it helpful to refer to the sections of the Guide that explain structure (paragraphs 3 to 13 of the Guide), the status of provisions (paragraphs 14 to 27 of the Guide) and cross-references (paragraphs 40 to 42 of the Guide).

03/09/2001

AUTH 1.3.4

(1) The Act, and the secondary legislation made under the Act, is complex. Although AUTH gives guidance to those considering or seeking authorisation, it does not aim to be exhaustive.

(2) References have been made to relevant provisions in the Act or secondary legislation. However, since reproducing an entire statutory provision would sometimes require a lengthy quotation, or considerable further explanation, many provisions of the Act, or secondary legislation made under the Act, are summarised. For the precise details of the legislation, readers of the manual should, therefore, refer to the Act and the secondary legislation itself, as well as the manual.

(3) The Act and the Explanatory Notes are available from the Stationery Office (the Act, ISBN 0-10-540800-X, £21.70; and the Explanatory Notes, ISBN 0-10-560800-9, £14.50). Secondary legislation made by the Treasury under the Act can be obtained from the Stationery Office or can be accessed through the Treasury's website (www.hm-treasury.gov.uk).

03/09/2001

AUTH 1.3.5

Guidance on the Act or secondary legislation made under the Act represents the FSA's view and does not bind the Courts. In the event of any discrepancy between the manual and the Act or that secondary legislation, the provisions of the Act or the secondary legislation prevail. It remains each person's responsibility to ensure that, at all times, his activities comply with the Act and with other relevant provisions (including general requirements such as company law or consumer credit) and to take all necessary steps to satisfy himself of this, including where necessary by seeking his own legal advice.

03/09/2001

AUTH 1.3.6

AUTH uses words and phrases that have specific meanings in the Handbook or in legislation; these may be different from, or more precise than, their usual dictionary meanings. Defined terms used in the text of the Handbook are shown in italics (see paragraph 43 of the Reader's Guide). For the meanings of defined terms used in AUTH, see the Glossary (either the extracts at the end of AUTH or the consolidated Glossary near the end of the Handbook). It is essential that readers refer to these definitions.

03/09/2001

AUTH 1.3.7

AUTH 1.3.9 G summarises AUTH. Readers should note that in a cross-reference, as explained in paragraph 40 of the Reader's Guide, the code letters of the manual or sourcebook immediately precede the chapter number. For example, AUTH 1 is the first chapter of the Authorisation manual.

03/09/2001

AUTH 1.3.8

The FSA is keen to encourage an interactive authorisation process. With this in mind, AUTH gives specific contact points in the FSA from which an applicant can get help with questions about its application. To help readers, the contact points are listed at AUTH 1.9.2 G.

03/09/2001

AUTH 1.3.9

Summary of AUTH

This table belongs to AUTH 1.3.7 G

Chapter:

Applicable to:

On:

AUTH 2:
Authorisation and regulated activities

a person wishing to find out whether it needs to be authorised (or is an exempt person).

the Act, the Regulated Activities Order and the Exemption Order.

AUTH 3:
Applications for Part IV permission

an applicant for Part IV permission.

how the FSA will exercise the powers granted to it in Part IV of the Act to determine and, if appropriate, grant an application for Part IV permission.

AUTH 4:
Authorisation Fees

an applicant for Part IV permission.

the fees the FSA will levy on applicants for Part IV permission.

AUTH 5:
Qualifying for authorisation under the Act

1. an EEA firm wishing to exercise its EEA right and establish a branch in, or provide cross border services into, the United Kingdom;

how an EEA firm, a Treaty firm or a UCITS qualifier can qualify for authorisation under the Act.

2. a Treaty firm wishing to exercise its Treaty rights;

3. a prospective UCITS qualifier.

AUTH 6:
Approved persons

1. an applicant for Part IV permission seeking approval for a person to perform a controlled function under arrangements to be entered into by the firm or its contractors (including appointed representatives);
2. a candidate.

1. the controlled functions that the FSA has specified; and.
2. how the FSA will exercise the powers given to it in Part V of the Act to require firms to obtain prior approval for persons who will perform controlled functions.

Note: EEA firms, Treaty firms and UCITS qualifiers should refer to SUP 10 (Application).

AUTH 7:
Periodical publications, news services and broadcasts: application for certification

anyone involved in publishing periodicals, or in providing news services or broadcasts, who gives (or proposes to give) advice about securities or contractually based investments.

1. whether the person will be carrying on the regulated activity of advising on investments; and

2. how the FSA will exercise its power to give certificates.

AUTH 8:
Determining applications

1. applicants for Part IV permission generally;

1. the procedures which the FSA will follow when granting an application; and

2. an EEA firm or a Treaty firm that has submitted an application for approval of a person under the approved persons regime;

2. a summary of the FSA's decision making procedures for:
(a) refusing, or proposing to refuse, an application for Part IV permission or an application for approval under the approved persons regime; or

3. a candidate.

(b) granting, or proposing to grant, an application for Part IV permission subject to limitations or requirements not applied for or with a narrower description of regulated activity than that to which the application relates.

21/02/2002

AUTH 1.4

The FSA's approach to applications for Part IV permission: an overview

01/12/2004

AUTH 1.4.1

(1) Under the Act, there is a single process for applications for Part IV permission. However, the amount of detailed information that an applicant will have to submit as part of its application will be related to the risks posed to the FSA's regulatory objectives by the regulated activities and any unregulated activities that the applicant intends to carry on. Thus the information requested will depend on, and be proportional to, the nature of the application.

(2) This proportionality is reflected in the design of the application pack. Although all applicants have to complete certain standard sections, other sections of the pack are specific to certain types of business such as insurance business. In completing the relevant sections of the pack, the level of detailed information an applicant will be required to provide varies according to the nature of the application. Thus, for example, the FSA will require an applicant which seeks to carry on low-risk designated investment business activities to submit, among other things, a business plan and other information which is proportional and relevant to the applicant's size and the scope of its proposed business.

03/09/2001

AUTH 1.4.2

(1) To gain, and retain, the status of an authorised person, an applicant must satisfy and continue to satisfy certain minimum requirements, laid down in the Act. These are known as threshold conditions and further guidance is given in AUTH 3.8 and COND.

(2) The FSA will assess each application against the threshold conditions. During this assessment, the FSA may require further information from applicants to address any concerns. If an applicant can satisfy the threshold conditions in part only, the FSA may impose a limitation or a requirement on the Part IV permission applied for to enable the applicant to satisfy the threshold conditions.

03/09/2001

AUTH 1.4.3

(1) An applicant for Part IV permission will be expected to demonstrate to the FSA that it is ready, willing and organised to comply, and continue to comply, with the regulatory obligations that are relevant to the regulated activities it seeks Part IV permission to carry on.

(2) To do this, an applicant will need to familiarise itself with the relevant Principles, other rules and guidance that apply to the regulated activities it proposes to carry on. AUTH is designed as a guide, but it cannot alone equip applicants with all the detail of the regulatory obligations for a proposed business. Such detail is in the other parts of the Handbook.

03/09/2001

The FSA's approach to risk assessment

AUTH 1.4.4

(1) Alongside the assessment of the threshold conditions, described in AUTH 1.4.2 G (2), the FSA will operate its risk assessment process. This process enables the FSA to be proportional in its procedures, both in terms of the information which it seeks from an applicant and in the allocation of its own resources. The outcome of this process will help determine the relationship the FSA will seek to have with the applicant if it gives it Part IV permission.

(2) The process will include assessing the risks posed by the applicant against a number of probability and impact factors. The probability factors relate to the likelihood of an event happening, and the impact factors indicate the scale and significance of the problem if it occurred. For further details of the process see SUP 1.3 (The FSA's risk based approach to supervision). The FSA intends to communicate the outcome of its risk assessment to the firm (see SUP 1.3.10 G).

03/09/2001

AUTH 1.5

Understanding the requirements and standards of the regulatory system

01/12/2004

AUTH 1.5.1

The requirements and standards of the regulatory system, with which an authorised person must comply, vary depending on both the nature of the firm and the regulated activities it has permission to carry on. As part of preparing an application for Part IV permission, an applicant will need to familiarise itself with the rules, regulations and standards that would apply to the business it proposes to carry on. An applicant will then have to demonstrate how it proposes to comply, for example, with the high level systems and controls requirements in SYSC and, where relevant, the applicable rules in COB. EEA firms, Treaty firms or UCITS qualifiers which qualify for authorisation should also familiarise themselves with the relevant regulatory obligations before carrying on regulated activities in the United Kingdom.

03/09/2001

AUTH 1.5.2

(1) An EEA firm will be informed of any relevant regulatory obligations (known as applicable provisions) by the FSA or, in the case of an EEA firm which is an insurer, its Home State regulator, as part of the process of qualifying for authorisation.

(2) An applicant for Part IV permission should consult the notes to the application pack. They cross-refer to relevant parts of the Handbook, and this will help applicants to respond to certain questions.

03/09/2001

AUTH 1.5.3

As a general guide, all applicants for Part IV permission should be familiar with the threshold conditions (COND) and the Principles for Businesses (PRIN) in the High Level Standards part of the Handbook. To complete an application for Part IV permission, an applicant will also need to have regard to the following matters:

(1) Prudential requirements:

(a) the high level requirement for adequate resources, which is applicable to all firms, described in COND; and

(b) the detailed prudential requirements in the Interim Prudential Sourcebooks (collectively referred to as IPRU) and in the Integrated Prudential Sourcebook (PRU) in the Business Standards part of the Handbook. In addition to PRUThere are five interim sourcebooks that apply, respectively, to banks (IPRU(BANK)), building societies (IPRU(BSOC)), friendly societies (IPRU(FSOC)), insurance companies (IPRU(INS)) and investment business firms (IPRU(INV)). Guidance is given to applicants in AUTH 3 Annex 2 on determining which prudential category, and which sourcebook of IPRU, or section of PRU will apply.

An applicant will need to confirm that it will have adequate resources in place to meet the applicable requirements.

(2) Systems, controls and internal arrangements:

(a) the high level requirement for all firms to maintain adequate resources (including systems and human resources) described in COND and the high level standards for all firms in Senior management arrangements, systems and controls (SYSC); and

(b) the detailed requirements, many of which are regulated activity specific, in the sourcebooks in the Business Standards part of the Handbook; for example, in IPRU, PRU, the Training and Competence sourcebook (TC), the Money Laundering sourcebook (ML) and Conduct of Business sourcebook (COB); and the reporting requirements for firms in SUP 16 (Reporting requirements) and SUP 17 (Transaction reporting).

Before the FSA gives a Part IV permission, an applicant will need to confirm that it will have the necessary systems and controls in place.

(3) Approved persons:

(a) the high level standards contained in the Fit and Proper test for approved persons (FIT) and the Statements of Principle and Code of Practice for Approved Persons (APER); and

(b) the detailed rules about controlled functions and other matters in SUP 10 (Approved persons).

An applicant will need to identify the persons that will require approval from the FSA in conjunction with its application for permission. This approval is required before a person may perform a controlled function.

(4) Other regulatory obligations:

(a) the detailed regulatory obligations that apply to certain types of firm or regulated activity in COB, ICOB, MCOB, CASS, the Market Conduct sourcebook (MAR) and SUP;

(b) the obligations in Dispute resolution: Complaints (DISP) and Compensation (COMP); and

(c) the specialist sourcebooks included in the Handbook such as, for example, those for collective investment schemes, exempt professional firms and the market at Lloyd's.

31/10/2004

AUTH 1.5.4

A table of contents of the Handbook is at the end of the Reader's Guide.

03/09/2001

AUTH 1.6

Applying for Part IV permission: overview of the process

01/12/2004

AUTH 1.6.1

The formal procedures for applying for Part IV permission are described in AUTH 3. The application process is, however, interactive and includes discussions and, in some circumstances, an initial meeting with a potential applicant before it submits a completed application form. This section, therefore, outlines how the application process is likely to proceed in practice.

03/09/2001

AUTH 1.6.2

(1) Although the FSA does not require all applicants to appoint professional advisers to help with the application process, reports from professionals will be required in respect of some applications for Part IV permission (see AUTH 3.9.16 G and AUTH 3.9.17 G).

(2) In addition, a potential applicant should consider at an early stage whether, given the nature of the proposed business it is seeking to carry on and its own experience, it is appropriate to seek professional advice in connection with its application. For example, an applicant may need to seek professional advice from lawyers, auditors or reporting accountants, consultants, actuaries or its professional body, before making a formal application to the FSA.

(3) SUP 9 (Individual guidance) describes how a person may apply to the FSA for individual guidance which relates to its own particular circumstances or plans. Applicants should note, in particular, SUP 9.2.5 G, which states that the FSA will expect a person to have taken reasonable steps to research and analyse a topic before approaching the FSA for individual guidance. SUP 9.2.5 G also cautions that the FSA should not be viewed as a first port of call, except where only the FSA can give guidance.

03/09/2001

AUTH 1.6.3

Before beginning discussions with the FSA, an applicant for Part IV permission should have completed its business planning to determine what activities it proposes to undertake and the resources it will need to do so.

03/09/2001

AUTH 1.6.4

(1) An applicant should also have determined and established the appropriate legal entity through which the proposed activities are to be conducted - that is, whether it wishes to trade on its own account, or establish:

(a) a body corporate - for example, a limited company, which can be public or private and limited by shares or by guarantee, or a friendly society; or

(b) a partnership; or

(d) a UK branch.

(2) A limited liability partnership (regardless of the jurisdiction of incorporation) is a body corporate and does not fall within the definition of partnership, except in relation to SUP 10 (Approved persons). Most limited liability partners will be either directors or senior managers, but this will depend on the constitution of the limited liability partnership.

03/09/2001

AUTH 1.6.5

The legal status of an insurer and an applicant which seeks to carry on the regulated activity of accepting deposits is specified by threshold condition 1 (Legal status) (see COND 2.1).

03/09/2001

AUTH 1.6.6

The first stage in the application process is to establish whether the proposed business will carry on regulated activities requiring permission under Part IV of the Act (Permission to carry on regulated activities). AUTH 2 gives a high-level guide to the activities that are regulated under the Act and those that are excluded (but this is not a substitute for consulting the legislation itself); further queries may be referred to the FSA's Authorisation Enquiries team (see AUTH 1.9.2 G).

03/09/2001

AUTH 1.6.7

Once an applicant has determined that it needs to apply for Part IV permission, it should begin to gather the information needed for the formal application. At this stage, applicants are encouraged to begin discussion with the FSA's Enquiries and Applications Department (Applications team) about their plans and the application (see AUTH 1.9).

01/07/2003

AUTH 1.6.8

The FSA's application pack (that is, the set of forms for an application for Part IV permission, and the notes for their completion) and approved persons forms are available from the FSA website or by contacting the Enquiries and Applications Department (Applications team) (see AUTH 1.9.2 G).

01/07/2003

AUTH 1.6.9

Among other things, the applicant will need to:

(1) determine the precise scope of the permission it wishes to apply for; this should include the regulated activities (the specified activities and the specified investments in respect of which the activities are carried on: see AUTH 2 Annex 2 G ) and any limitations and requirements the applicant wishes to apply for to refine the scope of the regulated activities; an example includes a limitation on the types of client it wishes to carry on business with or a requirement not to hold or control client money;

(2) determine whether it needs to apply to the Society of Lloyd's for admission to the register of underwriting agents or to any other bodies; the timing of these applications should be included in the applicant's plans;

(3) determine which prudential category (and, if relevant, sub-category) will apply, and therefore its minimum regulatory financial requirements;

(4) determine the rules in the Handbook which will apply to the activities it proposes to carry on, and take all reasonable steps to ensure that it is ready, willing and organised to comply with those rules;

(5) determine the systems and controls necessary both to support its activities and to comply with the relevant rules, and have plans to implement and test these systems before the FSA determines its application;

(6) prepare a business plan setting out the planned activities (and related risks), budget and resources (human, systems and capital);

(7) determine which persons will fall under the FSA's approved persons regime and apply for the necessary approval; and

(8) obtain any auditors' or reporting accountants' reports that are required to support its application or have been requested by the FSA; the auditors or other professionals should be involved early in the process to ensure that the planned work on the application will be sufficient to enable them to provide any opinions required.

03/09/2001

AUTH 1.6.10

(1) It is in the interests of the applicant and the FSA that the application pack, when submitted, should be fully completed and address any areas of potential regulatory concern.

(2) If an applicant's plans are complex (for example, if they include insurance business, accepting deposits or certain types of designated investment business), high risk or innovative (for example, if they raise new or unusual issues), then the FSA would expect to be in discussion with the applicant while the applicant is developing the material needed for the formal application.

(3) Where appropriate - for example in an application for Part IV permission including insurance business or accepting deposits - FSA staff may, by agreement with the applicant, arrange a pre-application meeting or discuss aspects of the applicant's draft business plan or other relevant documents while the application is being prepared. This will help the FSA develop its knowledge of the applicant and the proposed business.

03/09/2001

AUTH 1.6.11

In addition, all applicants are encouraged to take the opportunity to discuss particular issues with the FSA as they arise, with a view to tackling them before submitting the completed application pack. Applicants are also advised to review the application pack before submission and check that they have provided adequate responses to all questions (that is, responses appropriate to the scope and scale of their activities and the risks they may pose to consumers).

03/09/2001

AUTH 1.6.12

After receiving the application pack, the FSA will begin its formal process of consideration. The FSA Applications and Individual Approvals teams will review the application pack and approved persons regime forms respectively. During this process, the FSA may ask for additional information and is likely to meet the applicant's management and visit its premises before determining the application.

01/07/2003

AUTH 1.7

Appointed representatives

01/12/2004

AUTH 1.7.1

An applicant for Part IV permission, an EEA firm or Treaty firm which is seeking to carry on designated investment business may wish to consider appointing an appointed representative if they become authorised.

03/09/2001

AUTH 1.7.2

(1) An appointed representative is a person who, as a result of satisfying conditions in section 39 of the Act (Exemption of appointed representatives) is an exempt person in respect of certain business which it carries on for an authorised person. The Act states that a person who is an authorised person cannot also be an appointed representative.

(2) The business for which an appointed representative may be exempt is specified in the Appointed Representatives Regulations. The business which an appointed representative carries on for a firm must fall within the scope of the firm's own permission.

(3) SUP 12 (Appointed representatives) contains guidance on the conditions in the Act, the Appointed Representatives Regulations and the FSA's rules and guidance which apply to a firm which is appointed or has appointed an appointed representative. An applicant for Part IV permission can notify the FSA of the persons it wishes to appoint as appointed representatives in the application pack.

18/10/2001

AUTH 1.8

What other general guidance is available from the FSA?

01/12/2004

AUTH 1.8.1

It will not always be clear to a person whether or not its prospective business activities will be such that it requires authorisation. The FSA has established an Authorisation Enquiries team to help in such cases.

03/09/2001

AUTH 1.8.2

The Authorisation Enquiries team gives assistance by:

(1) producing guidance for persons who wish to find out whether they need to be authorised (see AUTH 2 );

(2) publishing guidance about areas where persons may have difficulty deciding whether or not authorisation or exemption is needed (this is included in AUTH App X [to be added at later date]); and

(3) responding to oral and written enquiries from applicants, prospective applicants, EEA firms, Treaty firms or prospective UCITS qualifiers (or their professional advisers) about their particular position under the Act.

03/09/2001

AUTH 1.8.3

The Authorisation Enquiries team also handles enquiries about financial promotions. Under the Act, the communication of a financial promotion by an unauthorised person is prohibited, unless its contents have been approved by an authorised person, or an exemption applies.

03/09/2001

AUTH 1.8.4

As well as being included as an appendix to AUTH, copies of all current guidance issued by Authorisation Enquiries are available separately from the FSA website at www.fsa.gov.uk or through the FSA's Publications Enquiries department on 020 7066 3298. The Authorisation Enquiries team will be pleased to clarify or discuss any aspects of the guidance in more detail. Enquiries about the scope of the Act may be made to the Authorisation Enquiries helpline by telephone on 020 7066 0082 or by e-mail to authorisationenquiries@fsa.gov.uk.

01/10/2002

AUTH 1.8.5

The FSA will review its guidance from time to time and may need to amend or withdraw published or written guidance in the light of changing circumstances, developing business practices, or case law. For the status of guidance issued by the FSA, see paragraphs 25 to 28 inthe Reader's Guide.

03/09/2001

AUTH 1.9

Next steps?

01/12/2004

AUTH 1.9.1

To find out where next to look in the Authorisation manual, see AUTH 1 Annex 1 G. To find out who to contact at the FSA see AUTH 1.9.2 G.

03/09/2001

AUTH 1.9.2

Who to contact at the FSA

This table belongs to AUTH 1.9.1 G

FSA dept.

For advice on:

Contact details:

Authorisation and Approvals Department

The authorisation aspects of the Act and relevant secondary legislation made under the Act (for example, the Regulated Activities Order)

Authorisation Enquiries
The Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Telephone: 020 7066 0082

Authorisation and Approvals Department

Applications for Part IV permission

Authorisation Teams
The Financial Services Authority 25 The North Colonnade
Canary Wharf
London E14 5HS
Telephone: 020 7066 3954
email: corporate.authorisation@fsa.gov.uk

Regulatory Decisions

Passporting notifications (into or out of the United Kingdom)

Passport Notification Unit
The Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Telephone: 020 7066 1000
email: passport.notifications@fsa.gov.uk

Authorisation and Approvals Department

Applications for approval of persons under the approved persons regime

Enquiries and Applications Department (Individual Approvals team)
The Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Telephone: 020 7066 0019
Fax: 020 7066 0017
email: iva@fsa.gov.uk

01/07/2003

AUTH 1 Annex 1

Introduction to the Authorisation Manual

01/12/2004

Where to next?

AUTH 1 Ann 1

15/11/2001

AUTH 2

Authorisation and regulated activities

AUTH 2.1

Application and purpose

01/12/2004

Application

AUTH 2.1.1

This chapter is relevant to any person who needs to know what activities fall within the scope of the Act.

03/09/2001

Purpose

AUTH 2.1.2

The purpose of this chapter is to provide guidance:

(1) to unauthorised persons who wish to find out whether they need to be authorised and, if so, what regulated activities their permission needs to include;

(2) to authorised persons who may have questions about the scope of their existing permission.

03/09/2001

AUTH 2.2

Introduction

01/12/2004

AUTH 2.2.1

Under section 23 of the Act (Contravention of the general prohibition), a person commits a criminal offence if he carries on activities in breach of the general prohibition in section 19 of the Act (The general prohibition) (see AUTH 1.2.2 G). Although a person who commits the criminal offence is subject to a maximum of two years imprisonment and an unlimited fine, it is a defence for a person to show that he took all reasonable precautions and exercised all due diligence to avoid committing the offence.

03/09/2001

AUTH 2.2.2

Another consequence of a breach of the general prohibition is that certain agreements could be unenforceable (see sections 26 to 29 of the Act). This applies to agreements entered into by persons who are in breach of the general prohibition. It also applies to any agreement entered into by an authorised person if the agreement is made as a result of the activities of a person who is in breach of the general prohibition.

03/09/2001

AUTH 2.2.3

Any person who is concerned that his proposed activities may require authorisation will need to consider the following questions (these questions are a summary of the issues to be considered and have been reproduced, in slightly fuller form in the decision tree in AUTH 2 Annex 1 G):

(1) Will I be carrying on my activities by way of business (see AUTH 2.3)?

(2) Will I be managing the assets of an occupational pension scheme (see AUTH 2.3.2 G (3))?

(3) If the answer is 'Yes' to (1) or (2), will my activities involve specified investments in any way (see AUTH 2.6)?

(4) If so, will my activities be, or include, regulated activities (see AUTH 2.7)?

(5) If so, will I be carrying them on in the United Kingdom (see AUTH 2.4)?

(6) If so, will my activities be excluded (see AUTH 2.8 and AUTH 2.9)?

(7) If not, will I be exempt (see AUTH 2.10.5 G to AUTH 2.10.8 G)?

(8) If not, am I allowed to carry on regulated activities without authorisation (see AUTH 2.10.9 G to AUTH 2.10.16 G)?

(9) If not, do I benefit from the few provisions of the Act that authorise me without a permission under Part IV of the Act (see AUTH 1.2.4 G)?

(10) If not, what is the scope of the Part IV permission that I need to seek from the FSA (see AUTH 2 Annex 2 G and AUTH 3)?

03/09/2001

AUTH 2.2.4

The rest of this chapter provides a high level guide through the questions set out in AUTH 2.2.3 G. It aims to give an overall picture but in doing so it necessarily relies on the reader referring to statutory provisions to fill in the detail (which can be extensive).

03/09/2001

AUTH 2.2.5

The process of applying for Part IV permission is described in AUTH 3. But a list of the activities for which permission may be given is annexed to this chapter (see AUTH 2 Annex 2 G). You may find this helpful in providing an overview of the activities that are regulated. The list is included here because, with some exceptions, the investments and activities for which permission may be given are the same as the investments and activities specified in the Regulated Activities Order. The exceptions (which are explained in AUTH 3.4 and AUTH 3.5) involve distinctions being drawn within each of several activities and investments so specified. This creates a few additional categories for which permission must be sought.

03/09/2001

AUTH 2.3

The business element

01/12/2004

AUTH 2.3.1

Under section 22 of the Act (Regulated activities), for an activity to be a regulated activity it must be carried on 'by way of business'.

03/09/2001

AUTH 2.3.2

There is power in the Act for the Treasury to change the meaning of the business element by including or excluding certain things. They have exercised this power (see the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 SI No 1177 and the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2003 SI No 1476). The result is that the business element differs depending on the activity in question.

(1) The activity of accepting deposits will not be regarded as carried on by way of business by a person if he does not hold himself out as accepting deposits on a day-to-day basis and if the deposits he accepts are accepted only on particular occasions. In determining whether deposits are accepted only on particular occasions, the frequency of the occasions and any distinguishing characteristics must be taken into account.

(2) Except as stated in AUTH 2.3.2 G (2A) and AUTH 2.3.2 G (3), the business element is not to be regarded as satisfied for any of the regulated activities carried on in relation to securities or contractually based investments (or for those regulated activities carried on in relation to 'any property') unless a person carries on the business of engaging in one or more of the activities. This also applies to the regulated activities of arranging in relation to a regulated mortgage contract and advising on regulated mortgage contracts. This is a narrower test than that of carrying on regulated activities by way of business (as required by section 22 of the Act), as it requires the regulated activities to represent the carrying on of a business in their own right.

(2A) A person who carries on an insurance mediation activity will not be regarded as doing so by way of business unless he takes up or pursues that activity for remuneration. AUTH 2.3.3 G gives guidance on the factors that are relevant to the meaning of 'by way of business' in section 22 of the Act. AUTH App 5.4 (The business test) gives further guidance on the business element as applied to insurance mediation activities.

(3) A person managing assets on a discretionary basis while acting as trustee of an occupational pension scheme may in certain circumstances be regarded as acting by way of business even if he would not, in the ordinary meaning of the phrase, be regarded as doing so. The Financial Services and Markets Act (Carrying on Regulated Activities by Way of Business) Order 2001 contains some exceptions from this (see article 4).

(4) The business element for all other regulated activities is that the activities are carried on by way of business. This applies to the activities of effecting or carrying out contracts of insurance, certain activities relating to the Lloyd's market, entering as provider into a funeral plan contract and entering into regulated mortgage contracts or administering regulated mortgage contracts (see AUTH 2.7.20 G).

01/10/2002

AUTH 2.3.3

Whether or not an activity is carried on by way of business is ultimately a question of judgement that takes account of several factors (none of which is likely to be conclusive). These include the degree of continuity, the existence of a commercial element, the scale of the activity and the proportion which the activity bears to other activities carried on by the same person but which are not regulated. The nature of the particular regulated activity that is carried on will also be relevant to the factual analysis.

03/09/2001

AUTH 2.4

Link between activities and the United Kingdom

01/12/2004

AUTH 2.4.1

Section 19 of the Act (The general prohibition) provides that the requirement to be authorised under the Act only applies in relation to activities that are carried on 'in the United Kingdom'. In many cases it will be quite straightforward to identify where an activity is carried on. But when there is a cross border element, for example because a client is outside the United Kingdom or because some other element of the activity happens outside the United Kingdom, the question may arise as to where the activity is carried on.

03/09/2001

AUTH 2.4.2

Even with a cross border element a person may still be carrying on an activity 'in the United Kingdom'. For example, a person who is situated in the United Kingdom and who is safeguarding and administering investments will be carrying on activities in the United Kingdom even though his client may be overseas.

03/09/2001

AUTH 2.4.3

Section 418 of the Act (Carrying on regulated activities in the United Kingdom) takes this one step further. It extends the meaning that 'in the United Kingdom' would ordinarily have by setting out five additional cases. The Act states that, in these five cases, a person who is carrying on a regulated activity but who would not otherwise be regarded as carrying on the activity in the United Kingdom is, for the purposes of the Act, to be regarded as carrying on the activity in the United Kingdom.

(1) The first case is where a UK-based person carries on a regulated activity in another EEA State in exercise of rights under a Single Market Directive.

(2) The second case consists of the marketing in another EEA State of a UK-based collective investment scheme by the scheme's manager where the scheme in question is one to which the UCITS Directive applies.

(3) The third case is where a regulated activity is carried on by a UK-based person and the day-to-day management of the activity is the responsibility of an establishment in the United Kingdom.

(4) The fourth case is where a regulated activity is carried on by a person who is not based in the United Kingdom but is carried on from an establishment in the United Kingdom. This might occur when each of the stages that make up a regulated activity (such as managing investments) takes place in different countries. For example, a person's management is in country A, the assets are held by a nominee in country B, all transactions take place in country B or country C but all decisions about what to do with the investments are taken from an office in the United Kingdom. Given that the investments are held, and all dealings in them take place, outside the United Kingdom there may otherwise be a question as to where the regulated activity of managing investments is taking place. For the purposes of the Act, it is carried on in the United Kingdom.

(5) The fifth case, inserted by the ECD Regulations is, in effect, where an electronic commerce activity is carried on, from an establishment in the United Kingdom, in another EEA State. The ECO includes rules and guidance that apply to ECA providers based in the United Kingdom.

21/08/2002

AUTH 2.4.4

The application of the third and fourth cases will depend on how the activities carried on from the UK establishment are set up and operated.

03/09/2001

AUTH 2.4.5

A person who is based outside the United Kingdom but who sets up an establishment in the United Kingdom must therefore consider the following matters. First, he must not, unless he is authorised, carry on regulated activities in the United Kingdom. Second, unless he is authorised, the day-to-day management of the carrying on of the regulated activity must not be the responsibility of the UK establishment. This may, for example, affect those UK establishments that in the context of deposit-taking activities were, before the commencement of the Act, treated as representative offices of overseas institutions. Such institutions will need to seek authorisation if the responsibility for the day to day management of the accepting of deposits by them outside the United Kingdom is nevertheless effectively that of their UK establishment. Third, such a person will need to ensure that he does not contravene other provisions of the Act that apply to persons who are not authorised. These include the controls on financial promotion (section 21 of the Act (Financial promotion)), and on giving the impression that a person is authorised (section 24).

03/09/2001

AUTH 2.4.6

A person based outside the United Kingdom may also be carrying on activities in the United Kingdom even if he does not have a place of business maintained by him in the United Kingdom (for example, by means of the internet or other telecommunications system or by occasional visits). In that case, it will be relevant to consider whether what he is doing satisfies the business test as it applies in relation to the activities in question. In addition, he may be able to rely on the exclusions from certain regulated activities that apply in relation to overseas persons (see AUTH 2.9.15 G).

03/09/2001

AUTH 2.4.7

Electronic commerce activities, other than insurance business falling within the scope of the Insurance Directives, provided by an incoming ECA provider will not be regulated activities (see AUTH 2.9.18 G (2))

21/08/2002

AUTH 2.5

Investments and activities: general

01/12/2004

AUTH 2.5.1

In addition to the requirements as to the business test and the link to the United Kingdom, two other essential elements must be present before a person needs authorisation under the Act. The first is that the investments must come within the scope of the system of regulation under the Act (see AUTH 2.6). The second is that the activities, carried on in relation to those specified investments, are regulated under the Act (see AUTH 2.7). Both investments and activities are defined in the Regulated Activities Order made by the Treasury under section 22 of the Act.

03/09/2001

AUTH 2.5.2

The Regulated Activities Order contains exclusions. Exclusions may exist in relation to both the element of investment and the element of activity. Each should therefore be checked carefully. The exclusions that relate to specified investments are considered in AUTH 2.6, together with the outline of the specified investments. The exclusions that relate to activities are considered separately from the outline of activities (see AUTH 2.8 and AUTH 2.9).

03/09/2001

Modification of certain exclusions as a result of Investment Services and Insurance Mediation Directives

AUTH 2.5.3

The application of certain of the exclusions considered in AUTH 2.8 (Exclusions applicable to certain regulated activities) and AUTH 2.9 (Regulated activities: exclusions applicable to certain circumstances) is modified in relation to persons who are subject to the Investment Services Directive or the Insurance Mediation Directive. The reasons for this and the consequences of it are explained in AUTH 2.5.4 G, as respects the Investment Services Directive, and AUTH App 5 (Insurance mediation activities), as respects the Insurance Mediation Directive.

03/09/2001

Investment services

AUTH 2.5.4

It remains the Government's responsibility to ensure the proper implementation of the Investment Services Directive. In this Directive, persons (called 'investment firms') who are caught by the Directive must be brought within the scope of regulation under the Act. An investment firm is any person whose ordinary business involves the provision to third parties on a professional basis of core investment services (these services are described in the extract from the Directive in Schedule 2 to the Regulated Activities Order). The Investment Services Directive does not apply in the circumstances described in the extract from the Directive in Schedule 3 to the Regulated Activities Order. A person will need to consider whether he is an investment firm to which the Directive applies, having due regard to the provisions in Schedule 3 to the Regulated Activities Order.

03/09/2001

AUTH 2.5.5

For persons who are investment firms, the activities that must be caught by the Regulated Activities Order are those that are caught by the Investment Services Directive. To achieve this result, some of the exclusions in the Order (that will apply to persons who are not caught by the Directive) have been made unavailable to investment firms. Article 4(4) of the Regulated Activities Order (Specified activities: general) lists a number of exclusions that must be disregarded. These relate to the exclusions concerned with:

(1) the absence of holding out (see AUTH 2.8.4 G (1));

(2) transactions or arrangements with or through certain persons (see AUTH 2.8.4 G (2), AUTH 2.8.5 G (1) and AUTH 2.8.6 G (4));

(3) risk management (see AUTH 2.8.4 G (5) and AUTH 2.8.5 G (2));

(4) persons acting under powers of attorney (see AUTH 2.8.7 G);

(5) sale of goods (see AUTH 2.9.7 G);

(6) groups and joint enterprises (see AUTH 2.9.9 G); and

(7) sale of a body corporate (see AUTH 2.9.11 G).

01/10/2002

Insurance mediation or reinsurance meditation

AUTH 2.5.6

The Insurance Mediation Directive has in part been implemented through various amendments to the Regulated Activities Order. These include article 4(4A) (Specified activities: general) which precludes a person who, for remuneration, takes up or pursues insurance mediation or reinsurance mediation in relation to a risk or commitment situated in an EEA State from making use of certain exclusions. In other cases, some of the exclusions provided in relation to particular regulated activities are unavailable where the activity involves a contract of insurance. This is explained in more detail in AUTH App 5 (Insurance mediation activities).

03/09/2001

AUTH 2.6

Specified investments: a broad outline

01/12/2004

AUTH 2.6.1

The following paragraphs describe the various specified investments, taking due account of any exclusion that applies.

03/09/2001

Deposits

AUTH 2.6.2

A deposit is defined in article 5(2) of the Regulated Activities Order. This focuses on a sum of money paid by one person to another on terms that it will be repaid when a specified event occurs (for example, a demand is made).

03/09/2001

AUTH 2.6.3

Certain transactions are excluded. The definition of deposit itself excludes money paid in connection with certain transactions such as advance payments for the provision of goods or services and sums paid to secure the performance of a contract. The circumstances in which payments are excluded from the definition itself are exhaustively stated in article 5(3) of the Regulated Activities Order (Accepting deposits). In addition, there is a separate exclusion in article 9 of the Order (Sums received in consideration for the issue of debt securities) and another in article 9A (Sums received in exchange for electronic money). AUTH App 3.2.15 G to AUTH App 3.2.19 G contain guidance on the exclusion relating to electronic money.

01/10/2002

AUTH 2.6.4

In addition, several separate exclusions focus on the identity of the person paying the money or the person receiving it (or both).

(1) Payments by certain persons are excluded if they are made by specified persons (such as local authorities or national, or supranational, bodies) or by persons acting in the course of a business consisting wholly or partly of lending money.

(2) Exclusions apply for sums paid between certain persons who are linked in a specified way (such as group companies or close relatives).

(3) Exclusions apply to sums received by persons acting for specified purposes. This covers sums received by a practising solicitor acting in the course of his profession or by authorised or exempt persons carrying on one of a specified range of regulated activities and acting within the scope of their permission or exemption.

03/09/2001

Electronic Money

AUTH 2.6.4A

Electronic money is specified as an investment in article 74A of the Regulated Activities Order (as amended by the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002). It is defined, in article 2 of that order, as monetary value, as represented by a claim on the issuer, which is stored on an electronic device, issued on receipt of funds and accepted as a means of payment by persons other than the issuer. Further guidance is given in AUTH App 3 (Guidance on the scope of the regulated activity of issuing e-money).

27/04/2002

Rights under a contract of insurance

AUTH 2.6.5

Contract of insurance is defined to include certain things that might not be considered a contract of insurance at common law. Examples of such additions include capital redemption contracts or contracts to pay annuities on human life.

03/09/2001

AUTH 2.6.6

There are two main sorts of contracts of insurance. These are general insurance contracts and long-term insurance contracts. The Regulated Activities Order provides that, in certain specified circumstances, a contract is to be treated as a long-term insurance contract notwithstanding that it contains supplementary provisions that might also be regarded as relating to a general insurance contract (see article 3(3)).

03/09/2001

AUTH 2.6.7

The Regulated Activities Order uses two further terms in relation to contracts of insurance to identify those contracts under which rights are treated as contractually based investments.

(1) The first term is 'qualifying contracts of insurance' (referred to as life policies in the Handbook). This identifies those long-term insurance contracts under which rights are treated as contractually based investments. This term does not cover long-term insurance contracts which are contracts of reinsurance or, if specified conditions are met, contracts under which benefits are payable only on death or incapacity.

(2) The second term is 'relevant investments'. This term applies to:

(a) contractually based investments, which includes rights under life policies, and rights to or interests in such investments under article 89 of the Regulated Activities Order (Rights to or interests in investments); and

(b) rights under contracts of insurance other than life policies (but not rights to or interests in such rights).

This term is used in connection with the treatment, under various parts of the Regulated Activities Order, of persons carrying on insurance mediation activities (see AUTH App 5 (Insurance mediation activities) for further guidance on such activities).

03/09/2001

AUTH 2.6.8

Certain arrangements in relation to funeral plans are specifically excluded from being contracts of insurance if they would otherwise be so. The exclusion applies to arrangements that fall within the definition of a funeral plan contract (see AUTH 2.6.26 G) as well as arrangements that are excluded from the regulated activity of entering as provider into funeral plan contracts (see AUTH 2.8.14 G).

03/09/2001

Shares etc

AUTH 2.6.9

Shares are defined in the Regulated Activities Order as shares or stock in a wide range of entities; that is, any body corporate wherever incorporated and unincorporated bodies formed under the law of a country other than the United Kingdom. They include deferred shares issued by building societies as well as transferable shares in industrial and provident societies, credit unions and equivalent EEA bodies. These shares are transferable and negotiable in a way similar to other shares or stock and are treated as such for the purposes of defining regulated activities. They are specifically mentioned as being within the specified investment category of shares because other types of share issued by these mutual bodies are not transferable and are expressly excluded (see AUTH 2.6.10 G).

03/09/2001

AUTH 2.6.10

The following are excluded from the specified investment category of shares. Shares or stock in all open-ended investment companies are excluded from being treated in this particular category (but see AUTH 2.6.17 G). Exclusions from this category also apply to shares or stock in the share capital of certain mutuals or in equivalent EEA bodies. This takes out building society or credit union accounts and non-transferrable shares in industrial and provident societies. These may nevertheless be specified investments in another category (such as deposits in the case of building society accounts).

03/09/2001

Debt instruments

AUTH 2.6.11

Two categories of specified investments relating to debt instruments are dealt with under this heading. They broadly split into private debt and public sector debt.

(1) The first category of 'instruments creating or acknowledging indebtedness' (defined in article 77 of the Regulated Activities Order and referred to in the Handbook as debentures) expressly refers to a range of instruments such as debentures, bonds and loan stock and contains a catch-all reference to 'any other instrument creating or acknowledging indebtedness.'

(2) The second category (defined in article 78 of the Regulated Activities Order and referred to in the Handbook as government and public securities) refers to loan stock, bonds and other instruments creating or acknowledging indebtedness which are issued by or on behalf of any government, the assemblies for Scotland, Wales or Northern Ireland, a local authority or an international organisation.

An instrument cannot fall within both categories of specified investments relating to debt instruments. 'Instrument' is defined to include any record whether or not in the form of a document (see article 3(1) of the Regulated Activities Order).

03/09/2001

AUTH 2.6.12

Certain instruments are excluded from both these categories of specified investments. These include trade bills, specified banking documents (such as cheques and banknotes though not bills of exchange accepted by a banker) and contracts of insurance. There is a further exclusion from this category of specified investment dealing with public debt for National Savings deposits and products.

03/09/2001

Warrants

AUTH 2.6.13

The category of specified investment of instruments giving entitlements to investments (referred to in the Handbook as warrants) covers warrants and other instruments which confer an entitlement to subscribe for shares, debentures and government and public securities. This is one of several categories of specified investments that are expressed in terms of the rights they confer in relation to other categories of specified investment. The rights conferred must be rights to 'subscribe' for the relevant investments. This means that they are rights to acquire the investments directly from the issuer of the investments and by way of the issue of new investments (rather than by purchasing investments that have already been issued).

03/09/2001

AUTH 2.6.14

To keep clear distinctions between the different specified investment categories, instruments giving entitlements to investments are not to be regarded as options, futures or contracts for differences.

03/09/2001

Certificates representing securities

AUTH 2.6.15

The specified investment category of certificates representing certain securities covers certificates or other instruments which confer rights in relation to shares and debt securities. It includes depositary receipts.

03/09/2001

AUTH 2.6.16

There is an exclusion for any instrument that would otherwise fall within the specified investment category of units in a collective investment scheme. But the exclusion does not apply where the underlying investments covered by the certificate are issued by the same (non-public sector) issuer or constitute a single issue of public sector debt (such as a single issue of gilts). Certificates or other instruments conferring rights in respect of investments in these two cases continue to be treated as certificates representing certain securities.

03/09/2001

Units

AUTH 2.6.17

The specified investment category of units in a collective investment scheme includes units in a unit trust scheme, shares in open-ended investment companies and rights in respect of most limited partnerships. Shares in or securities of an open-ended investment company are treated differently from shares in other companies. They are excluded from the specified investment category of shares. This does not mean that they are not investments but simply that they are uniformly treated in the same way as units in other forms of collective investment scheme. The effect is that an open-ended investment company will, in issuing its shares, be subject to the restrictions on promotion of collective investment schemes in section 238 of the Act (rather than to restrictions, such as those in the Public Offers of Securities Regulations 1995, that apply to other forms of body corporate). For exclusions from the restrictions on the provisions of collective investment schemes, see the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 SI No 1060.

03/09/2001

AUTH 2.6.18

There are no exclusions in the Regulated Activities Order for this specified investment category. This is because 'collective investment scheme' is defined in section 235 of the Act (Collective investment schemes) for the purposes of the Act generally. But there is a separate power to provide for exemptions from that definition and the Treasury have exercised it (see the Financial Services and Markets (Collective Investment Schemes) Order 2001 SI No 1062). The result is that units in certain arrangements are excluded from being collective investment schemes (for example, closed-ended bodies corporate, franchise arrangements, timeshare schemes).

03/09/2001

Rights under a stakeholder pension scheme

AUTH 2.6.19

A stakeholder pension scheme is defined in section 1 of the Welfare Reform and Pensions Act 1999. Regulations made under that section set out detailed rules under which such schemes will operate (see the Stakeholder Pension Scheme Regulations 2000). Schemes must be registered with the Occupational Pensions Regulatory Authority and approved by the Board of the Inland Revenue. Rights under such schemes are specified investments for the purposes of the Regulated Activities Order. There are no exclusions in the Order.

03/09/2001

Options

AUTH 2.6.20

The specified investment category of options is limited to options to acquire or dispose of securities or contractually based investments, currency and certain precious metals and options to acquire or dispose of such options. Options to buy or sell other types of commodity will only fall within this specified investment category if they are options to buy or sell futures, or options to buy or sell contracts for differences, which are based on other commodities. But options to buy or sell other types of commodity may be contracts for differences (see AUTH 2.6.23 G).

03/09/2001

Futures

AUTH 2.6.21

Futures is the name given to rights under a contract for the sale of a commodity, or of property of any other description, under which delivery is to be made at a future date and at a price agreed on when the contract is made.

03/09/2001

AUTH 2.6.22

The key issue in determining whether something is an investment in this category for the purposes of the Regulated Activities Order is whether the contract is made for investment purposes rather than commercial purposes. Contracts which are made for commercial purposes are excluded from this specified investment category and the Regulated Activities Order contains several tests as to when that is, or is not, the case (some are conclusive, others only indicative).

03/09/2001

Contracts for differences

AUTH 2.6.23

The specified investment category of contracts for differences covers rights under contracts for differences and rights under other contracts whose purpose or pretended purpose is to secure a profit or avoid a loss by reference to fluctuations in certain factors. In addition to fluctuations in the value or price of property of any description or in an index, those factors also include fluctuations in any 'other factor designated in the contract'. This catches a wide range of factors. All contracts in this category are cash-settled instruments (as opposed to being settled by way of delivering something other than cash). Many would be unenforceable as gaming contracts were it not for section 412 of the Act (Gaming contracts). Examples of things that count as specified investments under this category are spread bets and interest rate swaps.

03/09/2001

AUTH 2.6.24

There are a number of exclusions. These include a case where the parties intend that the profit is to be secured or the loss to be avoided by taking delivery of property. This avoids overlap with the specified investment categories of options and futures. Also excluded are index-linked deposits and rights under certain contracts connected with the National Savings Bank or National Savings products. There is also provision to ensure that the specified investment category of contracts for differences does not include rights under life policies.

03/09/2001

Lloyd's investments

AUTH 2.6.25

Two types of specified investment are relevant. These are the underwriting capacity of a Lloyd's syndicate and a person's membership of a Lloyd's syndicate. There are no exclusions from these specified investment categories.

03/09/2001

Rights under a funeral plan

AUTH 2.6.26

Rights under a funeral plan contract are the rights to a funeral obtained by a person who pays for the funeral before the death of the person whose funeral it will be. This will be a specified investment with effect from 1 January 2002.

03/09/2001

Rights under a regulated mortgage contract

AUTH 2.6.27

In accordance with article 61(3)(a) of the Regulated Activities Order, a regulated mortgage contract is a contract which, at the time it is entered into, satisfies the following conditions:

(1) the contract is one where the lender provides credit to an individual or trustees (the "borrower");

(2) the obligation of the borrower to repay is secured by a first legal charge on land (other than timeshare accommodation) in the United Kingdom; and

(3) at least 40% of that land is used, or is intended to be used, as or in connection with a dwelling by the borrower (or, where trustees are the borrower, by an individual who is a beneficiary of the trust) or by a related person.

Detailed guidance on this is set out in AUTH App 4.4 (Guidance on regulated activities connected with mortgages).

31/10/2004

Rights to or interests in investments

AUTH 2.6.28

Rights to, or interests in, all the specified investments in AUTH 2.6 (except rights to, or interests in, rights under a regulated mortgage contract) are themselves treated as specified investments. The effect is that, in most cases, an activity carried on in relation to rights or interests derived from any of those investments is also a regulated activity if the activity would be regulated if carried on in relation to the investment itself. The exception is where the rights or interests relate to a pure protection contract or a general insurance contract.

31/10/2004

AUTH 2.6.29

There are several things that are not covered by this category (other than rights to, or interests in, rights under a mortgage contract). Anything that is covered by any other specified investment category is excluded, as are interests under the trusts of an occupational pension scheme. Finally, where a contract is excluded from the scope of the regulated activity of entering as provider into a funeral plan contract (see AUTH 2.8.14 G), then rights to, or interests in, the contracts of insurance or interests under the trusts, to which the contracts relate are also excluded from this specified investment category.

03/09/2001

AUTH 2.7

Activities: a broad outline

01/12/2004

AUTH 2.7.1

The following paragraphs describe the various specified activities. The exclusions relating to activities are dealt with in AUTH 2.8 and AUTH 2.9.

03/09/2001

Accepting deposits

AUTH 2.7.2

Whether or not accepting deposits is a regulated activity depends on the use to which the money is put. The activity is caught if money received by way of deposit is lent to others or if any other activity of the person accepting the deposit is financed wholly (or to a material extent) out of the capital of, or interest on, money received by way of deposit.

03/09/2001

Issuing e-money

AUTH 2.7.2A

Guidance on the regulated activity of issuing e-money is given in AUTH App 3.

01/10/2002

Effecting or carrying out contracts of insurance as principal

AUTH 2.7.3

The activities of effecting a contract of insurance or carrying out a contract of insurance are separate regulated activities, each requiring authorisation. But this only applies where they are carried on by a person who is acting as principal. This means that the activities of agents, such as loss adjusters, will not constitute this regulated activity. The activities of some agents may, however, constitute other regulated activities; for example, brokers arranging long-term insurance contracts may be caught as carrying on the regulated activity of arranging (bringing about) deals in contractually based investments (see AUTH 2.7.7 G).

03/09/2001

AUTH 2.7.4

In addition, certain other activities carried on in relation to rights under contracts of insurance are regulated activities. These are where the activity is carried on in relation to:

(1) life policies, where the regulated activities concerned are:

(a) dealing in investments as principal (see AUTH 2.7.5 G);

(b) managing investments (see AUTH 2.7.8 G);

(d) agreeing to carry on any of those activities (see AUTH 2.7.21 G); and

(2) rights under any contract of insurance, where the regulated activities concerned are:

(a) dealing in investments as agent (see AUTH 2.7.5 G); and

(b) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments (see AUTH 2.7.7 G);

(d) advising on investments (see AUTH 2.7.15 G); and

(e) agreeing to carry on any of those activities (see AUTH 2.7.21 G).

AUTH App 5 (Insurance mediation activities) has more guidance on these regulated activities where they are insurance mediation activities.

03/09/2001

Dealing in investments (as principal or agent)

AUTH 2.7.5

In relation to securities or life policies (or rights or interests in either), dealing as principal is only a regulated activity if certain conditions are satisfied (see AUTH 2.8.4 G (1)).

03/09/2001

AUTH 2.7.6

Both the activities of dealing in investments as principal and dealing in investments as agent are defined in terms of 'buying, selling, subscribing for or underwriting' certain investments. These investments are:

(1) for dealing in investments as principal, securities or contractually based investments (except rights under a funeral plan contract); and

(2) for dealing in investments as agent, securities and relevant investments (except rights under a funeral plan contract);

03/09/2001

Arranging deals in investments and arranging regulated mortgage activities

AUTH 2.7.7

[deleted]

(1) [deleted]

(2) [deleted]

18/10/2001

AUTH 2.7.7A

There are four arranging activities that are regulated activities under the Regulated Activities Order. These are:

(1) arranging (bringing about) deals in investments which are securities, relevant investments or the underwriting capacity of a Lloyd's syndicate or membership of a Lloyd's syndicate (article 25(1));

(2) making arrangements with a view to transactions in investments which are securities, relevant investments or the underwriting capacity of a Lloyd's syndicate or membership of a Lloyd's syndicate (article 25(2));

(3) arranging (bringing about) regulated mortgage contracts, which includes arranging for another person to vary the terms of a regulated mortgage contract entered into before 31 October 2004 (article 25A(1)); and

(4) making arrangements with a view to regulated mortgage contracts (article 25A(2)).

01/10/2002

Managing investments

AUTH 2.7.8

The regulated activity of managing investments includes several elements.

(1) First, a person must exercise discretion. Non-discretionary portfolio management (where the manager buys and sells, as principal or agent, on the instructions of some other person) is not caught by this activity, although it may be caught by a different regulated activity such as the activity of dealing in investments as principal or dealing in investments as agent. The discretion must be exercised in relation to the composition of the portfolio under management and not in relation to some other function (such as proxy voting) carried on by the manager.

(2) Second, the property that is managed must belong beneficially to another person. This excludes from the regulated activity the management by a person of his own property. But discretionary management of assets by a person acting in his capacity as trustee will be caught even though he is the legal owner of the assets.

(3) Third, the property that is managed must consist of (or include) securities or contractually based investments. Alternatively, discretionary management will generally be caught if it is possible that the property could consist of or include such securities or investments. This is the case even if there never has been any investment in securities or contractually-based investments, as long as there have been representations that there would be.

03/09/2001

Safeguarding and administering investments

AUTH 2.7.9

The activity of safeguarding and administering investments belonging to another is regulated, as is providing a service under which a person undertakes to arrange on a continuing basis for others actually to carry out the safeguarding and administering. In each case, both the elements of safeguarding and administering must be present before a person will be said to carry on the activity.

(1) Safeguarding is acting as custodian of the property, for example, holding any documents evidencing the investments such as the share certificate (although it is worth noting that there is express provision that an uncertificated investment may be safeguarded and administered).

(2) Administration covers services provided to the owner or manager of the property, such as settlement of sale transactions relating to an investment, dealing with income arising from the investment and carrying out corporate actions such as voting. The nature of administration services must be such that the custodian has no discretion (otherwise he is likely to be caught by the regulated activity of managing investments (see AUTH 2.7.8 G)).

03/09/2001

AUTH 2.7.10

The property that is safeguarded and administered must belong beneficially to another person. It must consist of (or include) securities or contractually based investments. Alternatively, safeguarding and administration will generally be caught if it is possible that the property could consist of (or include) such securities or investments. This is the case even if the property in question has never consisted of (or included) such securities or investments, as long as there have been representations that it would do.

03/09/2001

Sending dematerialised instructions

AUTH 2.7.11

The regulated activities relating to sending dematerialised instructions relate to the operation of the system for electronic transfer of title to security or contractually based investments. This is the system maintained under the Uncertificated Securities Regulations 2001 (and currently operated by CREST). Sending instructions on behalf of another is a regulated activity, as is causing such instructions to be sent if the person causing the sending is a system-participant, as defined in those Regulations. A system-participant is the person who has the computer and network connection to CREST.

03/09/2001

Establishing etc collective investment schemes

AUTH 2.7.12

The regulated activities carried on in relation to a collective investment scheme generally are the establishing, operating or winding up a collective investment scheme. Acting as the depositary and acting as sole director of an open-ended investment company are also separate regulated activities. In all these cases, the activities are regulated where the schemes themselves are authorised schemes for the purposes of the UK product regulation regime under Part XVII of the Act (Collective investment schemes) as well as where the schemes are unregulated schemes. The process for applying for authorisation of a collective investment scheme is described in CIS 2 (Authorised fund applications) and CIS 16 (Application and notification).

01/04/2004

AUTH 2.7.13

In addition, express provision is included in the Regulated Activities Order to make acting as trustee of an authorised unit trust scheme into a regulated activity. The full picture for authorised schemes (that is, schemes that can be promoted to the public) is as follows:

(1) Acting as trustee of an authorised unit trust scheme is expressly included as a regulated activity.
(2) Acting as a depositary of an open-ended investment company that is authorised under regulations made under section 262 of the Act (Open-ended investment companies), is a regulated activity.
(3) Acting as a sole director of such a company is a regulated activity.
(4) Managing an authorised unit trust scheme will amount to operating the scheme and so will be a regulated activity. A person acting as manager is also likely to be carrying on other regulated activities (such as dealing (see AUTH 2.7.5 G) or managing investments (see AUTH 2.7.8 G)).
(5) An open-ended investment company will, once it is authorised under regulations made under section 262 of the Act, become an authorised person in its own right under Schedule 5 to the Act (Persons concerned in Collective Investment Schemes). Under ordinary principles, a company operates itself and an authorised open-ended investment company will be operating the collective investment scheme constituted by the company. It is not required to go through a separate process of authorisation as a person because it has already undergone the process of product authorisation.
(6) Operators, trustees or depositaries of UCITS schemes constituted in other EEA States are also authorised persons under Schedule 5 of the Act if those schemes qualify as recognised collective investment schemes for the purposes of section 264 of the Act.

03/09/2001

Establishing etc stakeholder pension schemes

AUTH 2.7.14

The regulated activities carried on in relation to stakeholder pension schemes are the establishment, operating or winding up of a stakeholder pension scheme. Managers of such schemes will require authorisation as they will be operating the schemes.

03/09/2001

Advising on investments

AUTH 2.7.15

The regulated activity of advising on investments under article 53 of the Regulated Activities Order applies to advice on securities or relevant investments. It does not, for example, include giving advice about deposits or about things that are not specified investments for the purposes of the Regulated Activities Order (such as interests under the trusts of an occupational pension scheme). Giving advice on certain other specified investments is, however, regulated under other parts of the Regulated Activities Order (see AUTH 2.7.16A G and AUTH 2.7.17 G (2). Giving a person generic advice about specified investments (for example, invest in Japan rather than Europe) is not a regulated activity nor is giving information as opposed to advice (for example, listings or company news). However, the context in which something is communicated may affect its character; for example, if a person gives information on share price against the background that, when he does so, that will be a good time to sell, then this will constitute advice.

03/09/2001

AUTH 2.7.16

The advice must also be given to someone who holds specified investments or is a prospective investor (including trustees, nominees or discretionary fund managers). This requirement excludes advice given to a person who receives it in another capacity. An example of this might be a tax professional to whom advice is given to inform the practice of his profession or advice given to an employer for the purposes of setting up a group personal pension scheme. Further guidance on the meaning of advising on investments is in AUTH App 1.24 (Advising on investments).

03/09/2001

Lloyd's activities

AUTH 2.7.17

Certain activities carried on in connection with business at Lloyd's will be regulated. In addition to those already mentioned (arranging deals in the underwriting capacity of a Lloyd's syndicate or membership of a Lloyd's syndicate), there are three other regulated activities as follows.

(1) Managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's is a regulated activity. 'Managing agent' is defined in article 3(1) of the Regulated Activities Order.

(2) Advising on syndicate participation at Lloyd's, that is advising a person to become, or continue or cease to be, a member of a particular syndicate is also caught. Giving advice about syndicate participation (such as how members should use their capital within the market and arrange their syndicate participation) is a separate regulated activity to that of providing advice in relation to securities and contractually based investments (see AUTH 2.7.15 G). Appropriate permission will be needed.

(3) Arranging deals in contracts of insurance written at Lloyd's is also a regulated activity for the Society of Lloyd's itself.

03/09/2001

Entering funeral plan contracts

AUTH 2.7.18

Entering as provider into a funeral plan contract is a regulated activity. The 'provider' is the person to whom the pre-payments are made and who undertakes to provide, or secure the provision of, the funeral at some future point. He may be the funeral director or a third party who arranges for another person to provide the funeral. Certain types of funeral plan contract are excluded (see AUTH 2.8.14 G). This became a regulated activity on 1 January 2002.

01/10/2002

AUTH 2.7.19

In addition, other activities carried on in relation to rights under certain funeral plan contracts are regulated (see AUTH 2.7.5 G to AUTH 2.7.11 G and AUTH 2.7.15 G and AUTH 2.7.16 G). This is because such rights are classified as contractually based investments.

03/09/2001

Entering into and administering a regulated mortgage contract

AUTH 2.7.20

Entering into as lender, and administering a regulated mortgage contract are regulated activities under article 61 of the Regulated Activities Order (Regulated mortgage contracts). Guidance on these regulated activities is in AUTH App 4.7 (Entering into a regulated mortgage contract) and AUTH App 4.8 (Administering a regulated mortgage contract).

01/10/2002

Agreeing

AUTH 2.7.21

Agreeing to carry on most regulated activities is itself a regulated activity. But this is not the case if the underlying activities to which the agreement relates are those of accepting deposits, issuing e-money, effecting or carrying out contracts of insurance or carrying on any of the activities that are regulated in relation to collective investment schemes and stakeholder pension schemes. A person will need to make sure that he has appropriate authorisation at the stage of agreement and before he actually carries on the underlying activity (such as the dealing or arranging).

01/10/2002

AUTH 2.8

Exclusions applicable to particular regulated activities

01/12/2004

AUTH 2.8.1

Most regulated activities are subject to exclusions that are set out in the Regulated Activities Order directly following each activity.

03/09/2001

Accepting deposits

AUTH 2.8.2

Only one exclusion applies to the regulated activity of accepting deposits. A deposit taker providing its services as an electronic commerce activity from another EEA State into the United Kingdom (see AUTH 2.9.18 G) does not carry on a regulated activity. In addition to the situations that are excluded from being 'deposits' (see AUTH 2.6.2 G to AUTH 2.6.4 G), several persons are exempt persons in relation to the regulated activity of accepting deposits (see AUTH 2.10.8 G (2)).

21/08/2002

Issuing e-money

AUTH 2.8.2A

Certain 'small issuers' of e-money may apply to the FSA for a certificate to be excluded from the regulated activity of issuing e-money. To be eligible, the issuer must be a body corporate or a partnership (other than a full credit institution) with its head office in the United Kingdom and it must meet certain conditions. The FSA must give that issuer a certificate if it appears to the FSA that the issuer meets those conditions. Further guidance on those conditions and how the application is made is given in ELM 8.4 (The conditions for giving a small e-money issuer certificate).

27/04/2002

Effecting and carrying out contracts of insurance

AUTH 2.8.3

The following activities are excluded from both the regulated activities of effecting and carrying out contracts of insurance.

(1) In specified circumstances, the activities of an EEA firm when participating in a Community co-insurance operation are excluded. A Community co-insurance operation is defined in the Community Co-insurance Directive.

(2) Activities that are carried out in connection with the provision of on-the-spot accident or breakdown assistance for cars and other vehicles (such as repairs, vehicle retrieval, delivery of parts or fuel) are excluded.

(3) Electronic commerce activities provided by an incoming ECA provider where those activities are outside the scope of the Insurance Directives (see AUTH 2.9.18 G).

21/08/2002

Dealing in investments as principal

AUTH 2.8.4

The regulated activity of dealing in investments as principal applies to specified transactions relating to any security or to any contractually based investment (apart from rights under funeral plan contracts or rights to or interests in such contracts). The activity is cut back by exclusions as follows.

(1) Of particular significance is the exclusion in article 15 of the Regulated Activities Order (Absence of holding out etc). This applies where dealing in investments as principal involves entering into transactions relating to any security or assigning rights under a life policy (or rights or interests in such a contract). In effect, it superimposes an additional condition that must be met before a person's activities become regulated activities. The additional condition is that a person must hold himself out as making a market in the relevant specified investments or as being in the business of dealing in them, or he must regularly solicit members of the public with the purpose of inducing them to deal. This exclusion does not apply to dealing activities that relate to any contractually based investment except the assigning of rights under a life policy.
(2) Entering into a transaction relating to a contractually based investment is not regulated if the transaction is entered into by an unauthorised person and it takes place in either of the following circumstances (a transaction entered into by an authorised person would be caught). The first set of circumstances is where the person with whom the unauthorised person deals is either an authorised person or an exempt person who is acting in the course of a business comprising a regulated activity in relation to which he is exempt. The second set of circumstances is where the unauthorised person enters into a transaction through a non-UK office (which could be his own) and he deals with or through a person who is based outside the United Kingdom. This non-UK person must be someone who, as his ordinary business, carries on any of the activities relating to securities or contractually based investments that are generally treated as regulated activities.
(3) A person (for example, a bank) who provides another person with finance for any purpose can accept an instrument acknowledging the debt (and as security for it) without risk of dealing as principal as a result.
(4) A company does not deal as principal by issuing its own shares or share warrants and a person does not deal as principal by issuing his own debentures or debenture warrants.
(5) Risk-management activities involving options, futures and contracts for differences will not require authorisation if specified conditions are met. The conditions include the company's business consisting mainly of unregulated activities and the sole or main purpose of the risk management activities being to limit the impact on that business of certain kinds of identifiable risk.
(6) A person will not be treated as carrying on the activity of dealing in investments as principal if, in specified circumstances (outlined in AUTH 2.9), he enters as principal into a transaction:

(a) while acting as bare trustee (or, in Scotland, as nominee);
(b) in connection with the sale of goods or supply of services;
(c) that takes place between members of a group or joint enterprise;
(d) in connection with the sale of a body corporate;
(e) in connection with an employee share scheme;
(f) as an overseas person;
(g) as an incoming ECA provider (see AUTH 2.9.18 G).

01/10/2002

Dealing in investments as agent

AUTH 2.8.5

The regulated activity of dealing in investments as agent applies to specified transactions relating to any security or to any relevant investment (apart from rights under funeral plan contracts or rights to or interests in such contracts). In addition, the activity is cut back by exclusions as follows.

(1) An exclusion applies to certain transactions entered into by an agent who is not an authorised person which depend on him dealing with (or through) an authorised person. It does not apply if the transaction relates to a contract of insurance. There are certain conditions which must be satisfied for the exclusion to apply. These are that the agent must not give any relevant advice on the transaction and that he must not receive any remuneration from the transaction unless account is made to his client.

(2) There is an exclusion for risk-management transactions where the agent is dealing on behalf of a group company or a co-participant in a joint enterprise.

(3) In addition, exclusions apply in specified circumstances (outlined in AUTH 2.9 (Regulated activities: exclusions available in certain circumstances)) where a person enters as agent into a transaction:

(a) in connection with the carrying on of a profession or of a business not otherwise consisting of regulated activities (see AUTH 2.9.5 G);

(b) in connection with the sale of goods or supply of services (see AUTH 2.9.7 G);

(d) in connection with the sale of a body corporate (see AUTH 2.9.11 G);

(e) in connection with an employee share scheme (see AUTH 2.9.13 G);

(f) as an overseas person (see AUTH 2.9.15 G);

(g) as an incoming ECA provider (see AUTH 2.9.18 G);

(h) as a provider of non-motor goods or travel services where the transaction involves a general insurance contract that satisfies certain conditions (see AUTH 2.9.19 G);

(i) that involves a contract of insurance covering large risks situated outside the EEA (see AUTH 2.9.19 G).

More detailed guidance on the exclusions that relate to contracts of insurance is in AUTH App 5 (Insurance mediation activities).

21/08/2002

Arranging deals in investments and arranging regulated mortgage contracts

AUTH 2.8.6

The exclusions in relation to the regulated activities of arranging are of particular relevance in the context of raising corporate finance. Many of the exclusions outlined below relate to both the elements of the activity; that is, arranging (bringing about) deals in investments (under article 25(1) of the Regulated Activities Order) and making arrangements with a view to transactions in investments (under article 25(2) of the Regulated Activities Order). But several exclusions relate only to one of those activities.

(1) Under article 26, arrangements that do not or would not bring about the transaction to which they relate are excluded from article 25(1) and article 25A(1) only. A person will bring about an investment transaction only if his involvement in the chain of events leading to a transaction is of sufficient importance that without that involvement the transaction would not take place. This will require something more than the mere giving of advice (although giving such advice may be the regulated activity of advising on investments).

(2) Under article 27, simply providing the means by which parties to a transaction (or possible transaction) are able to communicate with each other is excluded from article 25(2) and article 25A(2) only. This will ensure that persons such as Internet service providers or telecommunications networks are excluded if all they do is provide communication facilities (and these would otherwise be considered to be arrangements made with a view to the participants entering into transactions). If a person makes arrangements that go beyond providing the means of communication, and add value to what is provided, he will lose the benefit of this exclusion.

(3) Under article 28, arranging investment transactions to which the arranger is to be a party is excluded from both article 25(1) and (2). The main purpose is to ensure that a person is not regarded as arranging deals for another when the transaction in question is one to which he intends to be a party. As a result, a person cannot both be engaging in a dealing activity (as principal or agent) and arranging deals for another as regards any particular transaction. But where the transaction involves a contract of insurance, article 28 will not apply if the person making the arrangements:

(a) is the only policyholder; or

(b) as a result of the transaction, would become the only policyholder.

Under article 28A, a person is excluded from article 25A(1) and (2) if he is to enter into the contract to which the arrangements relate. The article also excludes from article 25A(1) a person who arranges a variation to a contract to which he is or is to become a party.

(4) Under article 29, an unauthorised person who arranges investment transactions, with a view to a transaction between a third party and an authorised person, is excluded from article 25(1) and (2) and article 25A(1) and (2) if specified conditions as to advice and remuneration are satisfied. For example, the exclusion is dependent on the third party not receiving any advice on the transactions from the unauthorised person making the arrangements. The exclusion does not apply where the investment is a contract of insurance.

(5) Under article 29A, an unauthorised person is excluded from the regulated activity of arranging for another person to vary the terms of a regulated mortgage contract entered into after 31 October 2004 (article 25A(1)(b)). This is if the arranging is the result of:

(a) anything done in the course of the administration of a regulated mortgage contract by an authorised person under article 62(a); or

(b) anything done by the person making the arrangements in connection with the administration of a regulated mortgage contract under article 62(b).

(6) Under article 30, arranging investment transactions in connection with lending on the security of contracts of insurance is excluded from article 25(1) and (2) but only where a person is not carrying on insurance mediation or reinsurance mediation.

(7) Under article 31, making arrangements for finance (in whatever form) to be supplied to a person by a third party is excluded from article 25(1) and (2) if the finance is given in exchange for an instrument acknowledging the debt. This mirrors the exclusion from dealing in investments as principal in similar circumstances (see AUTH 2.8.4 G (3)).

(8) Under article 32, arrangements the only purpose of which is to provide finance to enable persons to enter into investment transactions are excluded from article 25(2) only. There is no equivalent exemption from article 25(1). But arrangements for the provision of finance will only be caught by that provision if the arrangements actually bring about the transaction.

(9) Under article 33, making arrangements under which clients will be introduced to third parties who will provide independent services (consisting of advice or the exercise of discretion in relation to certain investments) is excluded from article 25(2) and article 25(2A) only. The person to whom the introduction is made must be of a specified standing (including that of an authorised person). The exclusion does not apply where the arrangements relate to a contract of insurance.

(10) Under article 33A, making arrangements for introducing persons to:

(a) an authorised person who has permission to carry on certain regulated activities concerned with regulated mortgage contracts; or

(b) an appointed representative who is able to carry on any of those activities without breaching the general prohibition; or

is excluded from article 25A(2) subject to certain conditions related to the holding of client money and the disclosure of certain information.

(11) Under article 34, a company is not carrying on a regulated activity under article 25(1) or (2) of the Regulated Activities Order (Arranging deals in investments) by arranging for the issue of its own shares or share warrants and a person is not doing so by arranging for the issue of his own debentures or debenture warrants.

(12) Under article 35, a body carrying out international securities business of a specified type can apply to the Treasury for approval as an international securities self-regulating organisation (ISSRO). Arrangements made in order to carry out the functions of an ISSRO are excluded from article 25(1) and (2). The exclusion applies whether the arrangements are made by the ISSRO or by a person acting on its behalf.

(13) The following exclusions from both article 25(1) and (2) (outlined in AUTH 2.9) apply in specified circumstances where a person makes arrangements:

(a) while acting as trustee or personal representative (see AUTH 2.9.3 G);

(b) in connection with the carrying on of a profession or of a business not otherwise consisting of regulated activities (see AUTH 2.9.5 G);

(d) in connection with certain transactions by a group member or by a participator in a joint enterprise (see AUTH 2.9.9 G);

(e) in connection with the sale of a body corporate (see AUTH 2.9.11 G);

(f) in connection with an employee share scheme (see AUTH 2.9.13 G);

(g) as an overseas person (see AUTH 2.9.15 G);

(h) as an incoming ECA provider (see AUTH 2.9.18 G);

(i) as a provider of non-motor goods or services related to travel (see AUTH 2.9.19 G);

(j) involving the provision, on an incidental basis, of information to policyholders or potential policyholders about contracts of insurance (see AUTH 2.9.19 G);

(k) that involve a contract of insurance covering large risks situated outside the EEA (see AUTH 2.9.19 G).

More detailed guidance on the exclusions that relate to contracts of insurance is in AUTH App 5 (Insurance mediation activities).

01/10/2002

Managing investments

AUTH 2.8.7

The activities of persons appointed under a power of attorney are excluded, under article 38 of the Regulated Activities Order, from the regulated activity of managing investments, if specified conditions are satisfied. The exclusion only applies where a person is not carrying on insurance mediation or reinsurance mediation. In addition, the following exclusions (outlined in AUTH 2.9) apply in specified circumstances where a person manages assets:

(1) while acting as trustee or personal representative;

(2) in connection with the sale of goods or supply of services;

(3) that belong to a group member or participator in a joint enterprise.

(4) as an incoming ECA provider (see AUTH 2.9.18 G).

21/08/2002

Safeguarding and administering investments

AUTH 2.8.8

The exclusions from the regulated activity of safeguarding and administering investments are as follows.

(1) Safeguarding and administration activities carried on by one person are excluded if a specified third party undertakes a responsibility for the assets which is no less onerous than it would have if he were doing the safeguarding and administration himself. The effect of this is that an authorised person with permission to carry on this regulated activity (or in certain circumstances an exempt person) can delegate all or part of the activities without the delegate needing to be authorised and without loss of protection to the owner of the assets.

(2) Introductions to an authorised person, or to an exempt person acting within the scope of his exemption and in the course of a business, are excluded from that aspect of this regulated activity which consists of arranging safeguarding and administration of assets by another person (see AUTH 2.7.9 G).

(3) Certain specified activities (such as currency conversion and document handling) are excluded from being the administration of investments. A person who safeguards and administers assets will not be carrying on regulated activities if these are the only administration activities in which he engages. This is because a person must be carrying on both the activity of safeguarding and that of administration, or be arranging for both to be carried on by another, before he requires authorisation (see AUTH 2.7.9 G).

(4) The following exclusions apply in specified circumstances where a person safeguards and administers assets (or arranges for another to do so):

(a) while acting as trustee or personal representative (see AUTH 2.9.3 G);

(b) in connection with the carrying on of a profession or of a business not otherwise consisting of regulated activities (see AUTH 2.9.5 G);

(d) which belong to a group member or participator in a joint enterprise (see AUTH 2.9.9 G);

(e) in connection with an employee share scheme (see AUTH 2.9.13 G).

(f) as an incoming ECA provider (see AUTH 2.9.18 G); and

(g) that are contracts of insurance and, in so doing, provides information to policyholders or potential policyholders on an incidental basis in the course of his carrying on a business or profession not otherwise consisting of regulated activities (see AUTH 2.9.19 G (2)).

21/08/2002

Sending dematerialised instructions

AUTH 2.8.9

Exclusions from the regulated activity of sending dematerialised instructions apply in relation to certain types of instructions sent in the operation of the system maintained under the Uncertificated Securities Regulations 2001. The various exclusions relate to the roles played by participating issuers, settlement banks and network providers (such as Internet service providers) and to instructions sent in connection with takeover offers (as long as specified conditions are met). In addition, the following exclusions (outlined in AUTH 2.9) apply in specified circumstances where a person sends dematerialised instructions:

(1) while acting as trustee or personal representative (see AUTH 2.9.3 G);

(2) on behalf of a group member (see AUTH 2.9.3 G);

(3) as an incoming ECA provider (see AUTH 2.9.18 G).

01/10/2002

Establishing etc collective investment schemes

AUTH 2.8.10

There is only one exclusion from the range of activities specified as being regulated in relation to collective investment schemes. This exclusion relates to incoming ECA providers (see AUTH 2.9.18 G). In other cases, the key issue is whether or not what is being done relates to something that is a collective investment scheme. Exclusions exist in relation to that issue (see AUTH 2.6.18 G).

21/08/2002

Establishing etc stakeholder pension schemes

AUTH 2.8.11

The only exclusion from the range of activities specified as being regulated in relation to stakeholder pension schemes relates to incoming ECA providers (see AUTH 2.9.18 G).

01/10/2002

Advising on investments

AUTH 2.8.12

In certain circumstances, advice that takes the form of a regularly updated news or information service and advice which is given in one of a range of different media (for example, newspaper or television) is excluded from the regulated activity of advising on investments and advising on regulated mortgage contracts (see AUTH 7 (Periodical publications: news services and broadcasts: applications for certification)). Advice given in the course of the administration of a regulated mortgage contract by an authorised person is also excluded subject to certain conditions. In addition:

(1) the following exclusions apply in specified circumstances where a person is advising on investments or regulated mortgage contracts:

(a) while acting as trustee or personal representative (see AUTH 2.9.3 G);

(b) in connection with the carrying on of a profession or of a business not otherwise consisting of regulated activities (see AUTH 2.9.5 G); and

(2) the following exclusions apply in specified circumstances where a person is advising on investments:

(a) in connection with the sale of goods or supply of services (see AUTH 2.9.7 G);

(b) to a group member or participator in a joint enterprise (see AUTH 2.9.9 G);

(d) as an overseas person (see AUTH 2.9.15 G);

(e) that are limited to certain contracts of insurance covering risks to non-motor goods or related to travel (see AUTH 2.9.19 G);

(f) that are contracts of insurance covering large risks situated outside the EEA (see AUTH 2.9.19 G).

More detailed guidance on certain of these exclusions is in AUTH App 4 (Regulated activities connected with mortgages) and AUTH App 5 (Insurance mediation activities).

21/08/2002

Lloyd's activities

AUTH 2.8.13

Electronic commerce activities provided by an incoming ECA provider are excluded from the regulated activities that relate expressly to business carried on at Lloyd's (see AUTH 2.9.18 G). Otherwise the only exclusions that apply concern the regulated activity of arranging deals in its application to business carried on at Lloyd's.

03/09/2001

Entering funeral plan contracts

AUTH 2.8.14

Entering as provider into a funeral plan contract is not treated as a regulated activity where:

(1) the contract is one under which the sums received from the customer will be applied towards a contract of insurance on the life of the person whose funeral is to be provided or be held on trust for the purpose of providing a funeral; in each case certain specified conditions must be met for the exclusion to apply;

(2) the customer and the provider intend or expect that the funeral will be provided within one month of the contract being entered into;

(3) the contract is entered into before 1 January 2002.

(4) it is provided as an electronic commerce activity by an incoming ECA provider (see AUTH 2.9.18 G).

21/08/2002

Agreeing

AUTH 2.8.15

A person who agrees to carry on certain other regulated activities (which is itself a regulated activity - see AUTH 2.7.21 G) does not require authorisation where the person concerned is an overseas person and the agreement is reached as a result of a legitimate approach (see AUTH 2.9.12 G). For this exclusion to apply, the agreement must be one to arrange deals, manage investments, safeguard and administer investments or send dematerialised instructions. The provision of electronic commerce activities by an incoming ECA provider is also excluded from the regulated activity of agreeing to carry on certain other regulated activities (see AUTH 2.7.21 G). But this is not the case where the agreement relates to the regulated activity of effecting or carrying out contracts of insurance falling under the Insurance Directives (see AUTH 2.8.3 G). This is still a regulated activity when provided as an electronic commerce activity.

21/08/2002

AUTH 2.8.16

To the extent that an exclusion applies in relation to a regulated activity, then 'agreeing' to carry on an activity falling within the exclusion will not be a regulated activity. This is the effect of article 4(3) of the Regulated Activities Order.

03/09/2001

AUTH 2.9

Regulated activities: exclusions applicable into certain circumstances

01/12/2004

AUTH 2.9.1

The various exclusions outlined below deal with a range of different circumstances.

(1) Each set of circumstances described in AUTH 2.9.3 G to AUTH 2.9.17 G has some application to several regulated activities relating to securities, relevant investments or regulated mortgage contracts. They have no effect in relation to the separate regulated activities of accepting deposits, issuing e-money, effecting or carrying out contracts of insurance, advising on syndicate participation at Lloyd's, managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's, or entering as provider into a funeral plan contract. Within each set of circumstances, the Regulated Activities Order, in Chapter XVII of Part II of the Order, makes separate provision for each regulated activity affected. This is necessary because each exclusion has to be tailored to reflect the different nature of the regulated activity involved and the different language required (for example, some activities involve entering directly into transactions while others relate to the provision of services).

(2) The exclusion described in AUTH 2.9.18 G relates to electronic commerce activities provided by an incoming ECA provider. This exclusion applies to all regulated activities except effecting contracts of insurance or carrying out contracts of insurance.

01/10/2002

AUTH 2.9.2

The exclusions grouped together in the Regulated Activities Order are descr2.9.7ibed below in this chapter in general terms. The exact terms of each exclusion will need to be considered by any person who is considering whether they need authorisation. Each description is accompanied by an indication of which regulated activities are affected.

03/09/2001

Trustees, nominees or personal representatives

AUTH 2.9.3

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as principal;

(2) arranging (bringing about) deals in investments, arranging (bringing about) regulated mortgage contracts, making arrangements with a view to transactions in investments and making arrangements with a view to regulated mortgage contracts;

(3) managing investments;

(4) assisting in the administration and performance of a contract of insurance;

(5) safeguarding and administering investments;

(6) sending dematerialised instructions;

(7) advising on investments or regulated mortgage contracts;

(8) entering into regulated mortgage contracts; and

(9) administering regulated mortgage contracts.

The exclusion is, however, disapplied where a person is carrying on insurance mediation or reinsurance mediation. This is due to article 4(4A) of the Regulated Activities Order. Guidance on exclusions relevant to insurance mediation activities is in AUTH App 5 (Insurance mediation activities).

03/09/2001

AUTH 2.9.4

A person carrying on certain regulated activities does not require authorisation in specified circumstances if he is acting in a representative capacity. The representative capacities covered by the exclusions depend on the regulated activity concerned but, in most cases, the focus is on persons who are acting as trustee or personal representative. In broad terms, the exclusions apply to specified transactions, or activities, that are part of the discharge of his general obligations by the trustee or representative when he is acting as such. Many of the exclusions require that the trustee or representative must not hold himself out as providing services consisting of the regulated activity in question. In addition, he must not receive remuneration that is additional to any he receives for acting in the representative capacity (although a person is not to be regarded as receiving additional remuneration merely because his remuneration as trustee or representative is calculated by reference to time spent). The exclusions for entering into and for administering regulated mortgage contracts, however, work on a different basis. They apply where the activity relates to a regulated mortgage contract under which the borrower is a beneficiary.

03/09/2001

Professions or business not involving regulated activities

AUTH 2.9.5

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as agent;

(3) assisting in the administration and performance of a contract of insurance;

(4) safeguarding and administering investments; and

(5) advising on investments or regulated mortgage contracts.

03/09/2001

AUTH 2.9.6

The exclusions apply where the regulated activity is carried out in the course of a profession or business which does not otherwise consist of the carrying on of regulated activities in the United Kingdom. However, activities are only excluded to the extent that they may reasonably be regarded as a necessary part of the other services provided in the course of the profession or business. The exclusion does not apply if separate remuneration is received in respect of any regulated activity that is carried on. (See separate guidance for authorised professional firms in PROF).

21/02/2002

Sale of goods and supply of services

AUTH 2.9.7

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as principal;

(2) dealing in investments as agent;

(3) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(4) managing investments;

(5) safeguarding and administering investments; and

(6) advising on investments.

03/09/2001

AUTH 2.9.8

Broadly speaking, the exclusions focus on cases where the main business of a person is to sell goods or supply services but where certain activities may have to be carried on for the purposes of that business which would otherwise be regulated activities. The exclusions are not available where the customer to whom goods are sold or services are supplied is an individual. They are also not available where what is at issue is a transaction entered into, or service provided, in relation to rights under a contract of insurance or units in a collective investment scheme (or rights to, or interests in, either).

31/10/2004

Group and joint enterprises

AUTH 2.9.9

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as principal;

(2) dealing in investments as agent;

(3) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(4) managing investments;

(5) safeguarding and administering investments;

(6) sending dematerialised instructions; and

(7) advising on investments.

03/09/2001

AUTH 2.9.10

These exclusions apply to intra-group dealings and activities and to dealings or activities involving participators in a joint enterprise which take place for the purposes of, or in connection with, the enterprise. The general principle here is that, as long as activities that would otherwise be regulated activities take place wholly within a group of companies, then there is no need for authorisation. The same principle applies to dealings or activities that take place wholly within a joint enterprise entered into for commercial purposes related to the participators' unregulated business. The exclusions in (2), (3), (4) and (7) are disapplied where they concern a contract of insurance. Guidance on exclusions relevant to insurance mediation activities is in AUTH App 5 (Insurance mediation activities).

03/09/2001

Sale of body corporate

AUTH 2.9.11

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as principal;

(2) dealing in investments as agent;

(3) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(4) advising on investments.

03/09/2001

AUTH 2.9.12

The exclusions only apply where the object of the transaction may reasonably be regarded as being the acquisition of day-to-day control of the affairs of a body corporate. Whether or not day-to-day control is at stake is a question of fact based on an objective test. The Regulated Activities Order contains a non-exhaustive list of circumstances in which the day-to-day control requirement will be regarded as satisfied. These include the case where it is the acquisition or disposal of at least 50 per cent of the voting shares in the body corporate that is at issue. Certain additional requirements must also be satisfied. These exclusions do not have effect in relation to shares in an open-ended investment company. The exclusions in (2), (3), (4) and (7) are disapplied where they concern a contract of insurance. Guidance on exclusions relevant to insurance mediation activities is in AUTH App 5 (Insurance mediation activities).

03/09/2001

Employee share schemes

AUTH 2.9.13

This group of exclusions applies, in specified circumstance, to the regulated activities of:

(1) dealing in investments as principal;

(2) dealing in investments as agent;

(3) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(4) safeguarding and administering investments.

03/09/2001

AUTH 2.9.14

In broad terms, the exclusions apply to activities which further an employee share scheme, or are carried on in operation of such a scheme. They apply to activities carried on by the company whose securities or debentures (which are given an extended meaning for this exclusion) are the subject of the scheme. They also apply to activities of any company in the same group or of any trustee who holds certain types of securities or debentures under the scheme.

03/09/2001

Overseas persons

AUTH 2.9.15

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as principal;

(2) dealing in investments as agent;

(3) arranging (bringing about) deals in investments, making arrangements with a view to transactions in investments, arranging (bringing about) regulated mortgage contracts and making arrangements with a view to regulated mortgage contracts;

(4) advising on investments;

(5) entering into regulated mortgage contracts;

(6) administering regulated mortgage contracts;

(7) agreeing to carry on the regulated activities of managing investments, arranging (bringing about) deals in investments, making arrangements with a view to transactions in investments, safeguarding and administering investments or sending dematerialised instructions.

03/09/2001

AUTH 2.9.16

An overseas person is defined as a person who carries on what would be regulated activities (including any activity that is excluded from being a regulated activity) but who does not do so, or offer to do so, from a permanent place of business maintained by him in the United Kingdom. Where a person does not have a permanent place of business in the United Kingdom, he will not, in any event, need to rely on these exclusions unless what he does is regarded as carried on in the United Kingdom (see AUTH 2.4).

03/09/2001

AUTH 2.9.17

The exclusions are available for regulated activities other than those that relate to regulated mortgage contracts, in the two broad cases set out below. For some of these regulated activities, the exclusions apply in each case. In others, they apply in only one.

(1) The first case is where the nature of the regulated activity requires the direct involvement of another person and that person is authorised or exempt (and acting within the scope of his exemption). For example, this might occur where the person with whom an overseas person deals is an authorised person or where the arrangements he makes are for transactions to be entered into by such a person;

(2) The second case is where a particular regulated activity is carried on as a result of what is termed a 'legitimate approach'. An approach to an overseas person that has not been solicited by him in any way, or has been solicited in a way that does not contravene the restrictions on financial promotion in section 21 of the Act, is a legitimate approach. An approach that is made by him in a way that does not contravene section 21 of the Act is also a legitimate approach. In such circumstances, the overseas person can, without requiring authorisation, enter into deals with (or on behalf of) a person in the United Kingdom, give advice in the United Kingdom or enter into agreements in the United Kingdom to carry on certain regulated activities. The exemptions to the financial promotion restrictions made by the Treasury under section 21 of the Act (Restrictions on financial promotion) will be relevant to the question of whether those restrictions have been contravened (see separate guidance on financial promotion in AUTH App 1 (Financial promotion and related activities)).

03/09/2001

Incoming ECA providers

AUTH 2.9.18

(1) In accordance with article 3(2) of the E-Commerce Directive, all requirements on persons providing electronic commerce activities into the United Kingdom from the EEA are lifted, where these fall within the co-ordinated field and would restrict the freedom of such a firm to provide services. The coordinated field includes any requirement of a general or specific nature concerning the taking up or pursuit of electronic commerce activities. Authorisation requirements fall within the coordinated field. The services affected are generally those provided electronically, for example through the Internet or solicited e-mail.

(2) The Regulated Activities Order was amended by the Financial Services and Markets Act 2000 (Regulated Activities)(Amendment)(Electronic Commerce Directive) Order 2002 (SI 2002/[number to be added later]). This Order creates a general exclusion from regulated activities (except for the regulated activities of effecting or carrying out contracts of insurance). Where activities consist of electronic commerce activities, an incoming ECA provider will not require authorisation for such activities in the United Kingdom. This does not extend to the regulated activity of effecting or carrying out contracts of insurance falling under the Insurance Directives (see AUTH 2.8.3 G). However, services provided off-line in the United Kingdom (that is, other than as an electronic commerce activity) by such a firm which amount to regulated activities still require authorisation. ECO provides guidance and sets out rules that are relevant to both incoming and outgoing ECA providers. Incoming ECA providers have also to comply with any authorisation requirements in the country of origin of the services.

(3) Incoming ECA providers should note that notification requirements under the Single Market Directives still apply (see AUTH 5 ).

03/09/2001

Insurance mediation activities

AUTH 2.9.19

The exclusions in this group apply to certain regulated activities involving certain contracts of insurance. The exclusions and the regulated activities to which they apply are as follows.

(1) The first exclusion of this kind relates to certain activities carried on by a provider of non-motor goods or services related to travel in connection with general insurance contracts only. The contracts must be for five years duration or less and have an annual premium of no more than ?500. The contract must cover breakdown or loss of or damage to non-motor goods supplied by the provider or risks linked to travel services booked with the provider. There must not be any liability risk cover. The insurance must be complementary to the goods or services being supplied by the provider in the course of his carrying on a business or profession not otherwise consisting of regulated activities. This exclusion applies where the regulated activities concerned are:

(a) dealing in investments as agent;

(b) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(d) advising on investments.

(2) The second exclusion applies where information is provided to a policyholder by a person on an incidental basis in the course of that person's profession or business that does not otherwise consist of regulated activities. This exclusion applies where the regulated activities are:

(a) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(b) managing investments;

(d) safeguarding and administering investments;

(3) The third exclusion applies to certain general insurance contracts covering large risks where the risk is situated outside the EEA. This exclusion applies where the regulated activities concerned are:

(a) dealing in investments as agent;

(b) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(d) advising on investments.

Guidance on these and other exclusions relevant to insurance mediation activities is in AUTH App 5 (Insurance mediation activities).

03/09/2001

AUTH 2.10

Persons carrying on regulated activities who do not need authorisation

01/12/2004

AUTH 2.10.1

There are various provisions that disapply the general prohibition from specific persons in relation to the carrying on by them of particular regulated activities. There is, however, no general provision for persons to apply for an exemption.

03/09/2001

AUTH 2.10.2

Persons may be exempted from the general prohibition in relation to one or more particular regulated activities. The extent of any exemption may also be limited to specified circumstances (such as where another person who is authorised and has relevant permission has accepted responsibility for the regulated activities in question) or subject to specified conditions (such as a requirement that the activity is not carried on for pecuniary gain).

03/09/2001

AUTH 2.10.3

The Act provides that appointed representatives (see AUTH 2.10.5 G), recognised investment exchanges and recognised clearing houses (see AUTH 2.10.6 G) and certain other persons exempt under miscellaneous provisions (see AUTH 2.10.7 G) are exempt persons. Members of Lloyd's and members of the professions are not 'exempt persons' as such, but the general prohibition in section 19 of the Act only applies to them in certain circumstances. The distinction is significant in relation to various provisions (such as those in the Regulated Activities Order) that apply only to transactions and other activities that involve exempt persons.

03/09/2001

AUTH 2.10.4

Appointed representatives and the persons exempt under miscellaneous provisions cannot be exempt in relation to some regulated activities and authorised in relation to others. If a person is already authorised, and proposes to carry on additional regulated activities in respect of which he would otherwise be exempt as an appointed representative or under miscellaneous provisions, he must seek an extension to his existing permission to cover those additional activities. A person in either of these categories who would otherwise be exempt in relation to particular activities will, if he becomes authorised, no longer be able to rely on the exemption.

03/09/2001

Appointed representatives

AUTH 2.10.5

A person is exempt if he is an appointed representative of an authorised person. See SUP 12 (Appointed representatives). But where an appointed representative carries on insurance mediation or reinsurance mediation he will not be exempt unless he is included on the register kept by the FSA under article 93 of the Regulated Activities Order (Duty to maintain a record of unauthorised persons carrying on insurance mediation activities) (see AUTH App 5.13 (Appointed representatives).

03/09/2001

Recognised Investment Exchanges and Recognised Clearing Houses

AUTH 2.10.6

Investment exchanges and clearing houses can apply for recognition under Part XVIII of the Act (Recognised investment exchanges and clearing houses). See REC.

03/09/2001

Particular exempt persons

AUTH 2.10.7

Various named persons are exempted by Order made by the Treasury under section 38 of the Act from the need to obtain authorisation. Some of the exemptions are subject to restrictions as to the circumstances in which they apply. For example, a person is only exempt when acting in a particular capacity or for particular purposes.

03/09/2001

AUTH 2.10.8

The exemptions apply so as to confer exemption on persons from the general prohibition in respect of four distinct categories of regulated activities.

(1) The first category is carrying on any regulated activity, apart from effecting or carrying out contracts of insurance (or agreeing to do so). Exempt persons here are generally supranational bodies of which the United Kingdom or another EEA State is a member.

(2) The second category is the regulated activity of accepting deposits . Exempt persons here include municipal banks, local authorities, charities and industrial and provident societies.

(3) The third category is carrying on any of those regulated activities relating to securities or relevant investments or to 'any property' (or agreeing to do so). Exempt persons here include persons whose activities are subject to a certain degree of control or oversight by the Government.

(4) The fourth category is carrying on one or more specified regulated activities (or agreeing to do so). Exempt persons here cover a range of different persons.

03/09/2001

Members of Lloyd's

AUTH 2.10.9

Several activities carried on in connection with business at Lloyd's are regulated activities in respect of which authorisation must be obtained. These include the regulated activities of advising on syndicate participation at Lloyd's or managing the underwriting capacity of Lloyd's syndicate as a managing agent at Lloyd's or arranging (bringing about) deals in investments or making arrangements with a view to transactions in investments for another in relation to such participation or underwriting capacity.

03/09/2001

AUTH 2.10.10

But under section 316 of the Act (Direction by the FSA) the general prohibition does not apply to a person who is a member of the Society of Lloyd's unless the FSA has made a direction that it should apply. The general prohibition is disapplied in relation to any regulated activity carried on by a member relating to contracts of insurance written at Lloyd's. Directions can be made by the FSA in relation to individual members or the members of the Society of Lloyd's taken together. Alternatively, instead of being required to obtain authorisation, a member of the Society of Lloyd's may, as a result of a direction under section 316 of the Act, become subject to specific provisions of the Act even though he is not an authorised person.

03/09/2001

AUTH 2.10.11

A person who ceased to be an underwriting member at any time on or after 24 December 1996 may, without authorisation, carry out contracts of insurance he has underwritten at Lloyd's. But this is subject to any requirements or rules that the FSA may impose under sections 320 to 322 of the Act (Former underwriting members).

03/09/2001

Members of the professions

AUTH 2.10.12

The general prohibition does not in certain circumstances apply to a person providing professional services that are supervised and regulated by a professional body designated by the Treasury under section 326 of the Act (Designation of professional bodies) (see PROF). Certain of the exclusions from regulated activities outlined in AUTH 2.8 and AUTH 2.9 will be relevant to members of designated professional bodies. The regime outlined below applies only where no exclusion applies and a person will be carrying on a regulated activity.

03/09/2001

AUTH 2.10.13

Such a person may carry on regulated activities if the conditions outlined below are met, that is the person:

(1) is not affected by an order or direction made by the FSA under section 328 or 329 of the Act (Directions and orders in relation to the general prohibition) which has the effect of re-imposing the general prohibition in any particular case.

(2) is, or is controlled by, a member of a profession.

(3) does not receive any pecuniary reward or other advantage from the regulated activities which is given to him by any person other than his client (or if he does, he must account to his client for it).

(4) provides any service in the course of carrying on the regulated activities in a manner which is incidental to the provision of professional services.

(5) carries on only those regulated activities which are permitted by the rules of the professional body or in respect of which they are an exempt person.

(6) is not an authorised person.

03/09/2001

AUTH 2.10.14

The regulated activities that may be carried on in this way are restricted by an Order made by the Treasury under section 327(6) of the Act (Exemption from the general prohibition). Accordingly, under that section, a person may not by way of business carry on any of the following activities without authorisation:

(1) accepting deposits;

(2) effecting or carrying out contracts of insurance;

(3) dealing in investments as principal;

(4) establishing, operating or winding up a collective investment scheme;

(5) establishing, operating or winding up a stakeholder pension scheme;

(6) managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's;

(7) entering as provider into funeral plan contracts;

(8) agreeing to do certain of the above activities.

03/09/2001

AUTH 2.10.15

In addition, there are restrictions on carrying on (or agreeing to carry on) certain other regulated activities. These relate to managing investments, advising on investments or regulated mortgage contracts, advising on syndicate participation at Lloyd's and entering into a regulated mortgage contract or administering a regulated mortgage contract.

03/09/2001

AUTH 2.10.16

A person carrying on regulated activities under the regime for members of the professions will be subject to rules made by the professional body designated by the Treasury. Such bodies are obliged to make rules governing the carrying on by their members of those regulated activities that they are able to carry on without authorisation under the Act. Where such a person is carrying on insurance mediation or reinsurance mediation, he must also be included on the register kept by the FSA under article 93 of the Regulated Activities Order (Duty to maintain a record of unauthorised persons carrying on insurance mediation activities) (see AUTH App 5.10 (Exemptions)).

03/09/2001

AUTH 2.11

What to do now?

01/12/2004

AUTH 2.11.1

Any person who concludes or is advised that he will need to make an application for Part IV permission should look at AUTH 2 Annex 2 G to determine the categories of specified investment and regulated activities that are relevant to the next step and should then refer to AUTH 3 for details of the application process.

03/09/2001

AUTH 2 Annex 1

Authorisation and regulated activities

01/12/2004

Do you need authorisation?

AUTH 2 Annex 1

03/09/2001

AUTH 2 Annex 2

Regulated activities and the permission regime

01/12/2004

AUTH 2 Annex 2.1

1.1 G

Table 1 is designed to relate the permission regime to regulated activities. Section 42(6) of the Act gives the FSA the power to describe the regulated activity or regulated activities for which it gives permission in such manner as the FSA considers appropriate. Table 1 details how the FSA has chosen to describe the regulated activities and specified investments for the purposes of the permission regime.

1.2 G

In an application for Part IV permission, an applicant will need to state the regulated activities it requires permission to carry on. This will involve an applicant identifying the regulated activities and the specified investments associated with those activities for which it requires Part IV permission.

1.3 G

Part II of the Regulated Activities Order (Specified activities) specifies the activities for the purposes of section 22 of the Act. This section states that an activity is a regulated activity if it is an activity of a specified kind which is carried on by way of business and:

(1)

relates to an investment of a specified kind; or

(2)

in the case of an activity specified for the purposes of section 22(1)(b) of the Act, is carried on in relation to property of any kind.

Part III of the Regulated Activities Order (Specified investments) specifies the investments referred to at AUTH 2 Annex 2.

1.4 G

Column 1 of Table 1 lists the regulated activities and column 2 lists the associated specified investments. Descriptions of some categories of specified investments are expanded in Tables 2 and 3. There are notes to all three tables which provide further explanation where appropriate.

1.5 G

A reference to an article in the tables in AUTH 2 Annex 2 G is to the relevant article in the Regulated Activities Order.

Table 1: Regulated Activities [See note 1 to Table 1]

Regulated activity

Specified investment in relation to which the regulated activity (in the corresponding section of column one) may be carried on

Accepting deposits

(a) accepting deposits (article 5)

deposit (article 74)

Issuing electronic money

(aa) issuing electronic money (article 9B)

electronic money (article 74A)

Insurance business

(b) effecting contracts of insurance (article 10(1))

contract of insurance (article 75) [Expanded in Table 2]

Designated investment business [see note 1A and 1B to Table 1]

(d) dealing in investments as principal (article 14) [see note 2 to Table 1]

security [Expanded in Table 3]; or

(e) dealing in investments as agent (article 21) [see note 2 to Table 1]

contractually based investment [Expanded in Table 3]

(f) arranging (bringing about) deals in investments (article 25(1)) [see note 1B to Table 1] [also see Sections of Table 1 headed 'Lloyd's market' and 'regulated mortgage activities']

(g) making arrangements with a view to transactions in investments (article 25(2)) [see note 1B to Table 1] [also see Sections of Table 1 headed 'Lloyd's market' and 'regulated mortgage activities']

(h) managing investments (article 37) [see note 3 to Table 1]

(i) safeguarding and administering investments (article 40) [see note 3 Table 1]

For the purposes of the permission regime, this regulated activity is subdivided into:

(i)

safeguarding and administration of assets (without arranging);

(ii)

arranging safeguarding and administration of assets

(j) advising on investments (article 53) [see note 1B to Table 1] [also see Section of Table 1 headed 'Lloyd's market' and 'regulated mortgage activity']

For the purposes of the permission regime, this regulated activity is subdivided into:

(i)

advising on investments (except pension transfers and pension opt-outs);

(ii)

advising on pension transfers and pension opt-outs [see note 4 to Table 1]

(k) sending dematerialised instructions (article 45(1))

(l) causing dematerialised instructions to be sent (article 45(2))

(m) establishing, operating or winding up a collective investment scheme (article 51(1(a))

[see note 5 to Table 1]

For the purposes of the permission regime, this regulated activity is subdivided into:

(i)

establishing, operating or winding up a regulated collective investment scheme;

(ii)

establishing, operating or winding up an unregulated collective investment scheme

(n) acting as trustee of an authorised unit trust scheme (article 51(1)(b))

(o) acting as the depositary or sole director of an open-ended investment company (article 51(1)(c))

(p) establishing, operating or winding up a stakeholder pension scheme (article 52)

Insurance mediation activity [see note 5A to Table 1]

(pa) dealing in investments as agent (article 21)

life policy [see note 5B to Table 1]

(pb) arranging (bringing about) deals in investments (article 25(1))

pure protection contract [see note 5C to Table 1]

(pc) making arrangements with a view to deals in investments (article 25(2))

general insurance contract [see note 5D to Table 1]

(pd) assisting in the administration and performance of a contract of insurance (article 39A)

rights to or interests in investments (Article 89) in so far as they relate to a life policy

(pe) advising on investments (article 53)

For the purposes of the permission regime, this regulated activity is subdivided into:

(i)

advising on investments (except pension transfers or pension opt-outs);

(ii)

advising on pension transfers or pension opt-outs [See note 5E to Table 1]

The Lloyd's market [see note 6 to Table 1]

(q) advising on syndicate participation at Lloyd's (article 56)

membership of a Lloyd's syndicate (article 86(2))

(r) managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's (article 57)

underwriting capacity of a Lloyd's syndicate (article 86(1))

(s) arranging (bringing about) deals in investments (article 25(1))

underwriting capacity of a Lloyd's syndicate (article 86(1)), membership of a Lloyd's syndicate (Article 86(2)) or rights to or interests in investments (Article 89) in so far as they relate to underwriting capacity of a Lloyd's syndicate or membership of a Lloyd's syndicate

(t) making arrangements with a view to transactions in investments (article 25(2))

Funeral plan providers

(u) entering as provider into a funeral plan contract (article 59) [see note 1A]

funeral plan contract (article 87)

Regulated mortgage activity

(v) arranging (bringing about) regulated mortgage contracts (article 25(A)(1))

regulated mortgage contract (Article 88)

(w) making arrangements with a view to regulated mortgage contracts (article 25(A)(2))

(x) advising on regulated mortgage contracts (article 53A)

(y) entering into a regulated mortgage contract (article 61(1))

(z) administering a regulated mortgage contract (article 61(2))

Notes to Table 1

Note 1:

In addition to the regulated activities listed in Table 1, article 64 of the Regulated Activities Order specifies that agreeing to carry on a regulated activity is itself a regulated activity in certain cases. This applies in relation to all the regulated activities listed in Table 1 apart from:

• accepting deposits (article 5);

• issuing electronic money (article 9B)

• effecting and carrying out contracts of insurance (article 10);

•establishing, operating or winding up a collective investment scheme (article 51(a));

• acting as trustee of an authorised unit trust scheme (article 51(1)(b));

• acting as the depositary or sole director of an open-ended investment company (article 51(1)(c)); and

• establishing, operating or winding up a stakeholder pension scheme (article 52).

Permission to carry on the activity of agreeing to carry on a regulated activity will be given automatically by the FSA in relation to those other regulated activities for which an applicant is given permission (other than those activities in articles 5, 9B, 10, 51 and 52 detailed above).

Note 1A:

Funeral plan contracts are contractually based investments. Accordingly, the following are regulated activities when carried on in relation to a funeral plan contract: (a) arranging (bringing about) deals in investments, (b) making arrangements with a view to transactions in investments, (c) managing investments, (d) safeguarding and administering investments, (e) advising on investments, (f) sending dematerialised instructions and (g) causing dematerialised instructions to be sent (as well as agreeing to carry on each of the activities listed in (a) to (g)). However, they are not designated investment business.

Note 1B:

Life policies are contractually based investments. Where the regulated activities listed as designated investment business in (e) to (g) and (j) are carried on in relation to a life policy, these activities also count as 'insurance mediation activities'. The full list of insurance mediation activities is set out in (pa) to (pe). The regulated activities of agreeing to carry on each of these activities will, if carried on in relation to a life policy, also come within both designated investment business and insurance mediation activities.

Note 2:

For the purposes of the regulated activities of dealing in investments as principal (article 14) and dealing in investments as agent (article 21), the definition of contractually based investments [expanded in Table 3] excludes a funeral plan contract (article 87) and rights to or interests in funeral plan contracts.

Note 3:

(i) The regulated activities of managing investments (article 37) and safeguarding and administering investments (article 40) may apply in relation to any assets, in particular circumstances, if the assets being managed or safeguarded and administered include, or may include, any security or contractually based investment.

Note 4:

(j) For the purposes of the permission regime, the activity in (j)(ii) of advising on pension transfers and pension opt-outs is carried on in respect of the following specified investments:

• unit (article 81);

• stakeholder pension scheme (article 82); and

• life policy (as defined in note 5);

• rights to or interests in investments in so far as they relate to a unit, a stakeholder pension scheme or a life policy.

Note 5:

Article 4(2) of the Regulated Activities Order specifies the activities (m) to (p) for the purposes of section 22(1)(b) of the Act. That is, these activities will be regulated activities if carried on in relation to any property and are not expressed as relating to a specified investment.

Note 5A:

Where they are carried on in relation to a life policy, the activities listed as insurance mediation activities in (pa) to (pe) (as well as the regulated activity of agreeing to carry on those activities) are also designated investment business.

Note 5B:

Life policy is the term used in the Handbook to mean 'qualifying contract of insurance' (as defined in Article 3(1) of the Regulated Activities Order), and except in COB 3, AUTH App 1 and AUTH App 5 the term also includes a long-term care insurance contract which is a pure protection contract.

Note 5C:

Pure protection contract is the term used in the Handbook to mean a long-term insurance contract which is not a life policy.

Note 5D:

General insurance contract is the term used in the Handbook to mean contract of insurance within column 1 of Table 2.

Note 5E:

For the purposes of the permission regime, the activity in (pe)(ii) of advising on pension transfers and pension opt-outs is carried on in respect of the following specified investments:

• life policy (explained in note 5A);

• rights to or interests in investments in so far as they relate to a life policy.

Note 6:

• Section 315 of the Act (The Society: authorisation and permission) states that the Society of Lloyd's has permission to carry on the regulated activities referred to in that section, one of which is specified in article 58 of the Regulated Activities Order. This permission is unique to the Society of Lloyd's.

Table 2: Contracts of insurance

Contract of insurance (article 75 of the RAO)

(a) general insurance contract (Part I of Schedule 1 to the Regulated Activities Order)

(b) long-term insurance contract (Part II of Schedule 1 to the Regulated Activities Order)

1.1.3 Number

(1)

Accident (paragraph 1)

life and annuity (paragraph I)

(a)

Sickness (paragraph 2)

marriage and birth (paragraph II)

(i)

Land vehicles (paragraph 3)

linked long-term (paragraph III)

(ii)

Railway rolling stock (paragraph 4)

permanent health (paragraph IV)

(iii)

Aircraft (paragraph 5)

tontines (paragraph V)

(iv)

Ships (paragraph 6)

capital redemption (paragraph VI)

(v)

Goods in transit (paragraph 7)

pension fund management (paragraph VII)

(vi)

fire and natural forces (paragraph 8)

collective insurance (paragraph VIII)

(vii)

damage to property (paragraph 9)

social insurance (paragraph IX)

(viii)

motor vehicle liability (paragraph 10)

(ix)

aircraft liability (paragraph 11)

(x)

liability of ships (paragraph 12)

(xi)

general liability (paragraph 13)

(xii)

credit (paragraph 14)

(xiii)

suretyship (paragraph 15)

(xiv)

miscellaneous financial loss (paragraph 16)

(xv)

legal expenses (paragraph 17)

(xvi)

assistance (paragraph 18)

Notes to Table 2

Note 1: See IPRU(INS) Ann 10.2 Part II for the groups of classes of general insurance business from the Annex to the First non-Life Directive.

Note 2: See IPRU(INS) 11.8 and the definition of ancillary risks in IPRU(INS) and AUTH 3.12.6 G to AUTH 3.12.12 G for guidance on the treatment of supplementary and ancillary provisions in relation to contracts of insurance.

Table 3: Securities, contractually based investments and relevant investments [see notes 1 and 2 to Table 3]

Security (article 3(1))

Contractually based investment (article 3(1))

Relevant investment (article 3(1))

share (article 76)
debenture (article 77)
government and public security (article 78)
warrant (article 79)
certificate representing certain security (article 80)
unit (article 81)
stakeholder pension scheme (article 82)
rights to or interests in investments (article 89) in so far as they relate to any of the above categories of security

option (article 83)
For the purposes of the permission regime, option is subdivided into:
• option (excluding a commodity option and an option on a commodity future);
• commodity option and option on a commodity future.
future (article 84)
For the purposes of the permission regime, future is subdivided into:
• future (excluding a commodity future and arolling spot forex contract);
• commodity future;
• rolling spot forex contract.
contract for differences (article 85)
For the purposes of the permission regime, contract for differences is subdivided into:
• contract for differences (excluding a spread bet and a rolling spot forex contract);
• spread bet;
• rolling spot forex contract.
life policy (but excluding a long-term care insurance contract which is a pure protection contract) [see note 5B to Table 1]
funeral plan contract (article 87) [see note 1A to Table 1]
rights to or interests in investments (article 89) in so far as they relate to any of the above categories of contractually based investment.

contractually based investment (article 3(1))
pure protection contract [see note 5C to Table 1]
general insurance contract [see note 5D to Table 1]

Notes to Table 3

Note 1:
1. Security, contractually based investment and relevant investment are not, in themselves, specified investments they are defined as including a number of specified investments as set out in Table 3. Relevant investments is the term that is used to cover contractually based investments together with rights under a general insurance contract and a pure protection contract.
Note 2:
(1) For the purposes of the regulated activities of dealing in investments as principal (article 14) and dealing in investments as agent (article 21), the definition of contractually based investments excludes a funeral plan contract (article 87) and rights to or interests in funeral plan contracts.

31/10/2004

AUTH 3

Applications
for Part IV permission

AUTH 3.1

Application and purpose

01/12/2004

Application

AUTH 3.1.1

This chapter applies to:

(1) an individual, a body corporate (including a branch of a body corporate), a partnership or an unincorporated association which is not an authorised person and which wishes to apply for Part IV permission to carry on regulated activities in the United Kingdom;

(2) an EEA firm or a Treaty firm seeking to carry on regulated activities in the United Kingdom other than through the exercise of an EEA right or Treaty right;

(3) an EEA firm, Treaty firm or UCITS qualifier wishing to apply for a top-up permission to carry on any regulated activity.

03/09/2001

Purpose

AUTH 3.1.2

This chapter gives guidance to applicants on how the FSA will exercise the powers granted to it in Part IV of the Act (Permission to carry on regulated activities) to determine an application and give Part IV permission. In particular, the chapter gives guidance on:

(1) permission under Part IV of the Act;

(2) the procedures, under section 51 of the Act (Application under this Part), for making an application to the FSA for Part IV permission;

(3) when and how the FSA will determine applications under section 52 of the Act (Determination of applications); and

(4) when and how a person becomes authorised under the Act.

03/09/2001

AUTH 3.2

Introduction

01/12/2004

AUTH 3.2.1

(1) With certain exceptions (for example, EEA firms), a person wanting to carry on any one or more regulated activities must apply to the FSA for Part IV permission. If the FSA gives an applicant such permission, the applicant will become an authorised person.

(2) Authorisation gives a firm the ability to carry on regulated activities without breaching the general prohibition and incurring criminal liability (see AUTH 2.2.1 G ). A firm may, however, be subject to regulatory action if it does not have the necessary Part IV permission for each regulated activity it carries on (see AUTH 3.3.3 G).

21/02/2002

AUTH 3.2.2

AUTH 3 Annex 1 G gives an overview of the application process from receipt of the application by the FSA.

03/09/2001

AUTH 3.3

When is Part IV permission required and what does it contain?

01/12/2004

AUTH 3.3.1

A person will, broadly speaking, be treated as carrying on a regulated activity in the United Kingdom (and so, under section 20(1), need permission), where it is carried on in the circumstances described in AUTH 2.4 (Link between activities and the United Kingdom). A Part IV permission under Part IV of the Act is required before the person carries on regulated activities unless the person has permission resulting from any other provisions in the Act (see AUTH 2.10 (Persons carrying on regulated activities who do not need authorisation)).

03/09/2001

AUTH 3.3.2

Under section 20(1) of the Act (Requirement for permission), a firm must not carry on a regulated activity in the United Kingdom (or purport to do so) otherwise than in accordance with its permission.

03/09/2001

AUTH 3.3.3

Following a successful application to the FSA, an applicant will be given Part IV permission. The Part IV permission will specify all or some of the following elements:

(1) a description of the activities the firm can carry on (see AUTH 3.4), including any limitations (see AUTH 3.6);

(2) the specified investments involved (see AUTH 3.5); and

(3) if appropriate, requirements (see AUTH 3.7).

03/09/2001

AUTH 3.3.4

(1) Section 42(6) of the Act (Giving permission) requires the FSA to describe the regulated activities for which a firm is given Part IV permission; this description may include limitations (see AUTH 3.6). The Part IV permission may also include requirements (see AUTH 3.7).

(2) After being given Part IV permission, a firm can apply at any time to have a limitation or a requirement varied or removed, following the procedures in SUP 6 (Application to vary or cancel Part IV permission).

03/09/2001

AUTH 3.3.5

Under section 51(3) of the Act, an application for permission must be made in such manner as the FSA directs (see AUTH 3.9.3 D).

03/09/2001

AUTH 3.4

Activities

01/12/2004

AUTH 3.4.1

(1) The activities for which an applicant may apply for Part IV permission are listed in AUTH 2 Annex 2 G (Regulated activities and the permission regime). The FSA has described these activities in the same way as regulated activities are specified in the Regulated Activities Order (see AUTH 2.7 to AUTH 2.8 ) but with three sub-divisions.

(2) The sub-divisions are that:

(a) advising on pension transfers and pension opt-outs is a separate category from advising on other investments; this distinction has been made because pension transfers and pension opt-outs are considered to be transactions which are high risk to consumers and it is appropriate to differentiate advice on them from other forms of advice;

(b) establishing, operating or winding up a collective investment scheme been sub-divided to distinguish regulated collective investment schemes from unregulated ones; this is because of the different regulatory requirements and risk characteristics of the two types of scheme; and

(c) safeguarding and administering investments has been divided into safeguarding and administration of assets (without arranging) and arranging safeguarding and administration of assets; this is because some firms arrange the provision of safe custody for clients instead of providing the facilities themselves.

03/09/2001

AUTH 3.4.2

It should be noted that some combinations of regulated activities are restricted by other legislation, such as the UCITS Directive and the Insurance Directives. In addition, applicants seeking to carry on specified activities in certain business areas, for example, ISA management, will be required to demonstrate that they satisfy additional regulatory obligations. Details of these restrictions and obligations are in AUTH 3.11 to AUTH 3.17.

03/09/2001

AUTH 3.4.3

If an applicant is uncertain whether the FSA will give Part IV permission for a particular combination of activities, it should seek professional advice and discuss the matter with the FSA before making a formal application for Part IV permission. These discussions with the FSA will not be part of the formal application process.

03/09/2001

AUTH 3.5

Specified investments

01/12/2004

AUTH 3.5.1

The specified investments for which an applicant may apply for Part IV permission are listed in AUTH 2 Annex 2 G . In general, the FSA has described these specified investments in a way that mirrors the activities specified in the Regulated Activities Order (see AUTH 2.6 ). The FSA has, however, sub-divided certain specified investments in the Regulated Activities Order to distinguish those investments which, among other things, are considered to have significantly different risk profiles. These are:

(1) commodity futures and commodity options and options on commodity futures, which have been distinguished from other futures and options;

(2) spread bets, which have been distinguished from other contracts for differences; and

(3) rolling spot forex contracts, which have been distinguished from other contracts for differences and futures.

03/09/2001

AUTH 3.6

Limitations

01/12/2004

AUTH 3.6.1

The FSA may include appropriate limitations in a description of the regulated activities in a Part IV permission.

03/09/2001

AUTH 3.6.2

Generally speaking, a limitation limits, in some way, a particular regulated activity. Unlike requirements (see AUTH 3.7), each limitation is specific to a particular regulated activity (either to the specified activity, the specified investments or both). This is why the Act refers to a limitation being incorporated within the actual description of the regulated activity.

03/09/2001

AUTH 3.6.3

As part of its application for Part IV permission, an applicant may wish to apply for certain limitations (details of which are given in the application pack). Alternatively, the FSA may impose a limitation where it considers it appropriate after reviewing the application. Examples of limitations which may be applied for or imposed include:

(1) a limit on the types of client that a firm may deal with; this would be used either where an applicant's business plan makes it clear that it only intends to provide services for specific types of clients (for example, see AUTH 3.6.4 G) or where the FSA wishes to limit the types of clients a firm can deal with; or

(2) a limit on the number of clients with whom a firm may carry on a particular regulated activity during, for example, an initial period of operation; this might be used where, for example, a firm's systems are not yet adequate to be able to process a high volume of transactions; or

(3) a limit on the types of specified investments that a firm can deal in; this would be used either where an applicant's business plan makes it clear that it only intends to provide services in respect of certain specified investments or where the FSA wishes to limit the categories of specified investments a firm can deal with; or

(4) a limit on the type of insurance business which a firm may carry on in connection with certain categories of specified investments for which Part IV permission may be granted; for example, a limitation specifying that only reinsurance business may be carried on in relation to certain specified investments; (note that for direct insurance business, the Insurance Directives restrict the ability of the FSA to impose limitations on an individual class of specified investment).

18/10/2001

AUTH 3.6.4

(1) In relation to the carrying on of designated investment business (and related ancillary activities, including communication and approval of related financial promotions), COB 4.1.4 R (Requirement to classify) requires a firm to classify a client before conducting designated investment business with him or for him and that classification is relevant to the application of Principles 6,7,8 and 9. The classification of clients is used to apply appropriately differentiated market conduct and conduct of business provisions based on the expertise of the different clients. An applicant may, therefore, wish to apply to carry on designated investment business in respect of one or more of the following classifications:

(a) private customer;

(b) intermediate customer;

(2) In practice, a firm may be permitted to carry on regulated activities that fall within the definition of designated investment business with one, or more, of these client categories.

(3) As explained in PRIN 1.2.4 G, a firm carrying on business other than designated investment business may choose to distinguish between customers and market counterparties in complying with the Principles. An applicant may, therefore, wish to apply to carry on business only with market counterparties.

(4) In relation to accepting deposits, the limitations which may be applied for or imposed include a limitation that the firm may accepting deposits from wholesale depositors only. A firm with such a limitation may receive less intensive supervision by the FSA, because of the reduced risk it poses to the regulatory objective of protecting consumers. However, the precise arrangements that would apply would be determined case by case and would be based on an assessment of the risks the firm posed to all four of the regulatory objectives.

15/11/2001

AUTH 3.6.5

If, after reviewing an application, the FSA proposes to impose a limitation, the applicant will be advised formally (that is, the applicant will be sent a warning notice) and given an opportunity to make representations before the FSA reaches a final decision. For an overview of how the FSA determines applications and a summary of the FSA's decision-making procedures, see AUTH 8 (Determining applications).

03/09/2001

AUTH 3.6.6

After the FSA gives a Part IV permission, a firm can apply at any time to vary that Part IV permission, including any limitation, following the procedures set out in SUP 6.

03/09/2001

AUTH 3.7

Requirements

01/12/2004

AUTH 3.7.1

(1) Section 43 of the Act (Imposition of requirements) gives the FSA power to include any requirements in a Part IV permission that it considers appropriate. A requirement may be imposed on a firm to:

(a) take a particular action; or

(b) refrain from taking a particular action.

(2) The requirement may extend to activities which are not regulated activities (for example, see AUTH 3.7.6 G (3)) and the FSA may set a time at which the requirement expires.

(3) As part of its application for Part IV permission, an applicant may wish to apply for certain requirements (details of which are given in the application pack).

03/09/2001

AUTH 3.7.2

Generally speaking, a requirement will either be unrelated to the performance of regulated activities (for example, a requirement that relates to reporting) or will relate to all, or a number of, the regulated activities which an applicant wishes to carry on. This can be contrasted with a limitation, which is specific to one particular regulated activitiy (either to the specified activity, the specified investments or both), as in AUTH 3.6.

03/09/2001

AUTH 3.7.3

(1) Requirements can, among other things, be used by the FSA to control the performance of certain business activities which are not in themselves regulated activities; although in many cases a firm will require permission for a combination of regulated activities before the business activity can be carried on. The business activities controlled in this way are those which, in the interests of consumer protection, have certain minimum standards, for example in respect of the systems and controls required to meet regulatory or other obligations (for example, see the client money rules in CASS 4).

(2) As a result, applicants will be asked to specify as part of their application whether or not they wish to carry on business activities that include:

(a) the holding or controlling of client money; or

(b) ISA, PEP, or CTF management (including, in the case of CTF management, details of any third party administrator that it engages and with details of whether it intends to offer Revenue allocated CTF's and whether it intends to provide its own stakeholder CTF); or

(d) management of a broker fund.

(3) As part of demonstrating that it can satisfy and continue to satisfy the threshold conditions in respect of the regulated activities it wishes to carry on, an applicant will be expected to demonstrate that it is ready, willing and organised to satisfy, and continue to satisfy, any relevant regulatory obligations that would apply to any business activities it wishes to carry on (for example, CASS 4 (Client money)). An applicant that does not wish to engage in these activities should apply for a requirement to exclude performance of these activities from the scope of its Part IV permission.

13/02/2004

AUTH 3.7.4

(1) A requirement can also be used by the FSA to define the scope of a number of regulated activities carried on by a firm so that a particular differentiated regulatory regime applies. Examples of such regimes include those for oil market participants, energy market participants, locals, venture capital firms, corporate finance advisory firms and service companies. Where this is relevant, an applicant may wish to apply for Part IV permission which includes a requirement defining the scope of each of its regulated activities.

(2) As an example, an applicant wishing to act as a corporate finance advisory firm may be given Part IV permission to carry on the activities of advising on investments and arranging (arranging (bringing about) deals in investments), subject to a requirement that the firm carries on these activities only within the definition of a corporate finance advisory firm.

(3) As part of the application pack, an applicant will be asked whether it wishes to apply for a requirement to define the scope of its Part IV permission. An applicant that applies for Part IV permission with a requirement to reduce the scope of that permission will only be required to demonstrate to the FSA that it is able to satisfy, and continue to satisfy, the threshold conditions in respect of the reduced scope.

21/02/2002

AUTH 3.7.5

As part of the application process, an applicant will need to determine which prudential category it falls into and, in some cases, which sub-category (see AUTH 3.8.5 G). In some cases, a requirement may form part of the description of such a category or sub-category, in which case the applicant may wish to apply for Part IV permission subject to appropriate requirements. The FSA may also impose a requirement on a firm to require it to comply with certain financial requirements (see SUP 7.4 (Individual requirements)).

03/09/2001

AUTH 3.7.6

Examples of requirements which may be applied by the FSA in particular circumstances, include:

(1) a requirement, imposed under section 48 of the Act (Prohibitions and restrictions), that a firm given Part IV permission obtain the approval of the FSA before payment of a dividend; or

(2) a requirement to submit financial returns more often than normal, for example during the firm's first months or years of business; or

(3) a requirement to submit audited financial accounts of a parent company; or

(4) a requirement, on the permission of an insurer, to carry on only reinsurance business; or

(5) a requirement to submit periodic independent compliance reviews, performed by an appropriate person, during the first months or years of business.

03/09/2001

AUTH 3.7.7

If, after reviewing an application, the FSA proposes to impose a requirement, the applicant will be advised formally (that is, the applicant will be sent a warning notice) and given an opportunity to make representations before the FSA reaches a final decision. For an overview of how the FSA determines applications and a summary of the FSA's decision making procedures, see AUTH 8.

03/09/2001

AUTH 3.7.8

Following the giving of a Part IV permission, a firm can apply, at any time, to vary that Part IV permission, including any requirement or limitation, following the procedures in SUP 6.

03/09/2001

AUTH 3.8

The threshold conditions and financial resources

01/12/2004

The threshold conditions

AUTH 3.8.1

(1) Under section 41(2) of the Act (The threshold conditions), the FSA is required, in giving Part IV permission or imposing any requirement, to ensure that the applicant satisfies, and will continue to satisfy, the threshold conditions in relation to all the regulated activities for which it has or will have permission. The threshold conditions are in Schedule 6 to the Act.

(2) The FSA has provided guidance on the threshold conditions in COND. This guidance is not exhaustive and is written at a high level of generality as satisfaction of the threshold conditions is considered on a case-by-case basis, in relation to each regulated activity an applicant is seeking to carry on.

03/09/2001

AUTH 3.8.2

(1) There are six threshold conditions and certain additional conditions applying to a firm with Part IV permission:

(a) threshold condition 1 (Legal status) sets out the legal status that the applicant must have if it wishes to carry on certain regulated activities;

(b) threshold condition 2 (Location of offices) provides that:

(i) a body corporate constituted under the law of any part of the United Kingdom must have its head office and, if it has one, its registered office, in the United Kingdom; and

(ii) a non body corporate with its head office in the United Kingdom must carry on business in the United Kingdom;

(ca) threshold condition 2A (Appointment of claims representatives) provides that if it appears to the FSA that any person is seeking to carry on, or carrying on, motor vehicle liability insurance business, that person must have a claims representative in each EEA State other than the United Kingdom;

(d) threshold condition 4 (Adequate resources) relates to the adequacy of an applicant's resources;

(e) threshold condition 5 (Suitability) relates to the suitability of the applicant;

(f) additional conditions apply to non-EEA insurers (see COND 2.6 (Additional Conditions)).

(2) Threshold conditions 2A, 3, 4, and 5 enable the FSA to assess the applicant in the light of the activities it wishes to carry on and, in particular, make it clear that suitability to carry on one regulated activity does not mean that the applicant is suitable to carry on all regulated activities. Threshold conditions 3, 4 and 5 do not apply to Swiss general insurance companies.

(3) An incoming firm applying for a top-up permission must also satisfy the threshold conditions with the exception of threshold condition 2 (Location of offices): see COND 1.1 Application) and paragraphs 6 and 7 of Schedule 6 to the Act.

(4) The application of the threshold conditions to Swiss general insurance companies was varied by the Financial Services and Markets Act 2000 (Variation of Threshold Conditions) Order 2001.

19/01/2003

AUTH 3.8.3

The FSA, in making a determination whether an applicant satisfies and will continue to satisfy the threshold conditions under section 41(2) of the Act, will consider whether an applicant can demonstrate that it is ready, willing and organised so as to enable it to comply with the specific regulatory obligations that will apply to the applicant if it is given Part IV permission to carry on the regulated activities referred to in its application.

03/09/2001

Financial resources

AUTH 3.8.4

(1) As part of its application, an applicant will be required to demonstrate that it has adequate financial resources to meet the financial resources requirement for its prudential category.

(2) The Single Market Directives, the Capital Adequacy Directive and the E-Money Directive set out minimum financial requirements for all firms which carry on banking, issuing e-money, insurance or investment services within the scope of the Single Market Directives and the E-Money Directive, that is, most firms that are credit institutions, financial institutions, insurance undertakings or investment firms as defined in these Directives. These requirements are reflected in PRU or in the relevant IPRU for each type of firm.

31/12/2004

AUTH 3.8.5

(1) An applicant will need to determine its prudential category and, in some cases, its sub-category. The application pack and AUTH 3 Annex 2 G give further details.

(2) In determining its prudential sub-category, an applicant may need to consider whether it falls under the scope of a Single Market Directive or the E-Money Directive, for example whether it will be an investment firm as defined in the ISD.

(3) However, an applicant which falls outside the Single Market Directive or the E-Money Directive will not have a right to passport into the EEA and will be subject to separate prudential requirements.

27/04/2002

AUTH 3.8.6

An applicant in the prudential category of bank or insurer should note that the FSA will give it individual guidance on its likely capital requirements: for example, the individual capital ratios for a bank (see IPRU(BANK) CO 4.1.1 (Individual capital ratios)) or the capital resources requirements of an insurer (see PRU 2.1)) during pre-application discussions (see AUTH 3.9.2 G).

31/12/2004

AUTH 3.8.7

Applicants should note that the prudential category and, where relevant, sub-category, not only determines which provisions in the relevant IPRU or PRU will apply, but which provisions on auditors, financial reporting and transaction reporting in the SUP will apply.

31/12/2004

AUTH 3.8.8

An applicant that is a member of a group should note that the FSA may take into consideration the impact of other members of the group on the adequacy of its resources (see the relevant sections of PRU or IPRU).

31/12/2004

AUTH 3.9

Procedures in relation to applications for Part IV permission

01/12/2004

Pre-application meetings

AUTH 3.9.1

All applicants for Part IV permission are encouraged to contact the Authorisation and Approvals Department of the FSA to discuss their application before they send in an application form.

01/07/2003

AUTH 3.9.2

(1) If an applicant's plans are complex (for example, including insurance business or accepting deposits and some designated investment business), high risk or innovative (for example, raising new or unusual issues), the FSA will expect the applicant to discuss its plans with them before submitting an application for Part IV permission.

(2) FSA staff will be available to attend a pre-application meeting with such applicants to discuss the application and any issues or problem areas. If appropriate, for example in the case of an application to carry on insurance business or accepting deposits, FSA staff may, by agreement with the applicant discuss aspects of the application during its preparation, for example, the applicant's draft business plan or other relevant documentation. If relevant, FSA staff will discuss likely capital and, where relevant, liquidity ratios with the applicant to enable the applicant to prepare capital adequacy projections.

(3) Applicants should note that:

(a) a pre-application meeting is not a substitute for an applicant obtaining any professional assistance;

(b) a pre-application meeting is to give informal assistance to applicants (as set out in AUTH 3.9.2 G). A meeting might, for example, be used to help an applicant prepare its formal application for Part IV permission and to identify and address issues or problem areas at an early stage before time and costs are incurred in preparing a complete application. This assistance is not part of the application process outlined in the rest of AUTH 3.9.

(c) the submission of an incomplete application will start the formal application process, including the time limits for determination of incomplete applications (see AUTH 3.9.31 G) and the requirements for a fee (see AUTH 3.9.4 G (1)).

03/09/2001

The application for permission

AUTH 3.9.3

(1) An applicant for Part IV permission, except in so far as the FSA may direct in an individual case, must apply in writing in the manner directed, and with the information required, in the application pack provided by the FSA.

(2) The application for Part IV permission must be:

(a) given to a member of, or addressed for the attention of, the Authorisation and Approvals Department; and

(b) delivered to the FSA by one of the methods in (3).

(3) The application may be delivered by:

(a) post to the address in (4);

(b) leaving the application at the address in (4) and obtaining a time-stamped receipt; or

(4) The address for applications is: The Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS.

(5) Until the application has been determined, an applicant which submits an application for Part IV permission must inform the FSA of any significant change to the information given in the application immediately it becomes aware of the change.

01/07/2003

AUTH 3.9.4

(1) An application should be accompanied by the application fee set by the FSA (see AUTH 4 (Authorisation Fees)).

(2) The application pack and accompanying guidance notes are available on www.fsa.gov.uk or from the Authorisation and Approvals Department of the FSA. To contact the Authorisation and Approvals Department:

(a) telephone on 020 7066 3954; or

(b) write to the Authorisation and Approvals Department at the address in AUTH 3.9.3 D (4); or

01/07/2003

AUTH 3.9.5

The application pack is made up of several sections and the ones which need to be completed will depend on the category of applicant. For example, the insurance sections will contain different application questions according to the type of applicant (for example, matters needing to be addressed vary for overseas applicants and Swiss general insurance companies). In addition, applicants will need to submit forms for approved persons (see AUTH 6 (Approved persons)) and controllers as part of the pack (see AUTH 3.9.24 G).

03/09/2001

Information to be supplied to the FSA

AUTH 3.9.6

Under section 51(1)(b) of the Act, an application for Part IV permission must give an address in the United Kingdom for service of any document required by the Act.

03/09/2001

AUTH 3.9.7

The application forms ask for general information about the applicant, its intended activities and any proposed or current unregulated activities. They also ask for details of how the applicant plans to comply with the FSA's regulatory obligations relating to the activities it seeks Part IV permission to carry on. The forms contain notes on completion and details of how the FSA can help.

03/09/2001

AUTH 3.9.8

In addition to the information in the application pack, the FSA may require the applicant to provide such further information as it reasonably considers necessary to enable it to determine the application, and to verify it as the FSA directs. This may include the provision of documents. The FSA may request such additional information during a pre-application meeting or after reviewing a submitted application pack. Should the FSA require further information on reviewing an application pack, the applicant will be advised in writing as early as possible.

03/09/2001

AUTH 3.9.9

The FSA will assess the applicant having regard to the regulatory objectives and will, therefore, be proportional in its procedures, including in the information which it seeks from applicants (see AUTH 1.4.4 G). Thus the nature of the information and documents requested by the FSA, either in the application pack or subsequently, will be proportional to the nature of the business the applicant intends to carry on. For example, a small company seeking to carry on low risk business will be required to submit a business plan and other information relevant to its size and the scope of the proposed business. Information which is requested from applicants as part of the application pack includes but is not limited to the following.

(1) A business plan which describes the regulated activities and any unregulated activities (except where not permitted, for example see AUTH 3.12.2 G) which the applicant proposes to carry on, the management and organisational structure of the applicant and details of any proposed outsourcing arrangements. The level of detail required in the business plan will be appropriate to the risks to consumers arising from the proposed regulated and unregulated activities. For an applicant seeking to carry on insurance business, the business plan should include a scheme of operations in accordance with SUP App 2 (Insurer and friendly societies: schemes of operation).

(2) Appropriately analysed financial budget and projections which demonstrate that the applicant expects to comply with the relevant financial resources requirements appropriate to the applicant's prudential category (and in some cases sub-category).

(3) Details of systems to be used (which do not have to be in place at the time of initial application), compliance procedures and documentation.

(4) Details of the individuals to be involved in running the proposed business (such as directors, partners and members of the governing body, all of whom will be performing controlled functions) and any connected persons (see AUTH 3.9.23 G). AUTH 6 gives guidance on the approved person regime and the procedures for approval.

03/09/2001

AUTH 3.9.10

(1) The application pack should be accompanied by such other information as the applicant reasonably considers the FSA should be aware of for the purposes of determining the application. Any relevant supporting documentation should also be enclosed. The guidance notes to the application pack give further details about information to be provided by applicants, to enable them to answer the questions.

(2) In certain circumstances, the interests of the customers of an applicant would be significantly affected by the death or incapacity of an individual within the applicant. If this is the case, the applicant will be required to provide information on its arrangements to protect the interests of customers in that event. Examples include arrangements to enable urgent transactions to be carried out and unfinished transactions to be completed. The information should include the name and address, and such other details as the FSA may reasonably require, of an authorised person with whom arrangements have been made for the protection of customers. The guidance notes to the application pack give further details.

03/09/2001

AUTH 3.9.11

The application forms also require a statement from one or more members of the applicant's governing body confirming, to the best of their knowledge, the completeness and accuracy of information supplied.

03/09/2001

AUTH 3.9.12

Applicants should be aware that there may be a delay in processing applications if the information given to the FSA is inaccurate or incomplete; for example, if the business plan for an applicant does not describe in adequate detail the regulated activities for which the applicant seeks Part IV permission. Applicants should discuss any problems with the Enquiries and Applications Department (Applications team) before submitting the application or, if necessary, consider seeking appropriate professional advice.

01/07/2003

AUTH 3.9.13

At any time after receiving an application and before determining it, the FSA may give notice to the applicant to require it to provide additional information or documents. The circumstances of each application will determine what additional information or procedures are appropriate.

03/09/2001

AUTH 3.9.14

While applicants will often wish to discuss applications with the Enquiries and Applications Department (Applications team) during the application process; similarly, the FSA will often need to discuss and clarify information that has been submitted within the application pack. The exchange of information during the application process is viewed as important by the FSA, since the final decision about an application needs to be based on as complete a picture of the application as possible.

01/07/2003

AUTH 3.9.15

In addition, in considering the application, the FSA may:

(1) carry out any enquiries which it considers appropriate, for example, discussions with other regulators or exchanges;

(2) ask the applicant, or any specified representative of the applicant, to attend meetings at the FSA to give further information and explain any matter the FSA considers relevant to the application;

(3) require any information given by the applicant to be verified in such a way as the FSA may specify (for example, see AUTH 3.9.16 G);

(4) take into account any information which it considers appropriate in relation to the application, for example any unregulated activities which the applicant carries on or proposes to carry on;

(5) visit the premises which the applicant intends to use as its place of business.

03/09/2001

Reports from third parties

AUTH 3.9.16

Under section 51(6) of the Act, the FSA may require the applicant to verify information provided in such a way as the FSA directs. Thus, as part of the application, the FSA may require the applicant to provide, at its own expense, a report by an auditor, reporting accountant, actuary or other qualified person approved by the FSA. The report may be on such aspects of the information provided, or to be provided, by the applicant as the FSA may specify.

03/09/2001

AUTH 3.9.17

Applicants seeking to carry on long-term insurance business are also required to provide a certificate from an actuary confirming the appropriateness of the projections for the long-term insurance business and, in particular, the adequacy of premium rates and technical provisions and margin of solvency and how quickly capital strains from effecting new business will be overcome.

03/09/2001

AUTH 3.9.18

If an applicant appoints a reporting accountant other than its own auditor to report on an application for Part IV permission, the applicant is directed to take reasonable steps to ensure that the reporting accountant satisfies the qualification and independence tests, as relevant, in SUP 3.4 (Auditor's qualifications) and SUP 3.5 (Auditor's independence).

03/09/2001

AUTH 3.9.19

If an applicant appoints an actuary, to report on an application for Part IV permission, the applicant is directed to take reasonable steps to ensure that the actuary satisfies the qualification tests in SUP 4.3.8 G (actuaries' qualifications).

31/12/2004

AUTH 3.9.20

Occasionally, the FSA may identify a need for an independent report on specific areas of an application; for example, a report from the auditors of an applicant seeking to carry on regulated activities which include accepting deposits where the applicant's business plan is innovative, complex or raises concerns as a result of matrix management. Such reports will usually be discussed and agreed with the applicant as part of the pre-application meeting (see AUTH 3.9.2 G).

03/09/2001

Applications to other bodies

AUTH 3.9.21

In addition to applying to the FSA for Part IV permission:

(1) an applicant which will need permission from the Council of the Society of Lloyd's to conduct business as underwriting agents should apply for that permission at the same time as its application to the FSA; and

(2) an applicant should also determine whether it needs to apply to any other bodies, for example, to any exchanges or to other bodies for membership, the Office of Fair Trading for a consumer credit licence or to court for licences such as a gaming licence; the applicant should check when any such applications should be made.

03/09/2001

Connected persons

AUTH 3.9.22

(1) Under section 49 of the Act (Persons connected with an application), in considering an application for Part IV permission, the FSA may have regard to any person appearing to it to be, or likely to be, in a relationship with the applicant which is relevant.

(1A) The Financial Groups Directive Regulations make special provision where the FSA is exercising its functions under Part IV of the Act (Permission to carry on regulated activities) for the purposes of carrying on supplementary provision. Broadly, where the FSA, in the course of carrying on supplementary supervision, is considering varying the Part IV permission of a person who is a member of a group which is a financial conglomerate, the consultation provision in section 49(2) of the Act are disapplied. In their place, the regulations impose special obligations, linked to the Financial Groups Directive, to obtain the consent of the relevant competent authorities, to consult those authorities and to consult with the group itself.

(2) A person in, or likely to be in, a relationship with an applicant which is relevant is known as a connected person. The FSA will assess whether a particular relationship is relevant in the light of the particular circumstances of each application. Examples of persons who might be considered connected with an applicant include, but are not limited to:

(a) a controller of the applicant; or

(b) an applicant's directors, partners or members of its governing body; or

(d) a person with whom the applicant intends to enter into a material outsourcing agreement; or

(e) any other person who may exert influence on the applicant which might pose a risk to the applicant satisfying or continuing to satisfy the threshold conditions.

03/09/2001

AUTH 3.9.23

As a result, as part of the application process, the FSA may request information about any other person who the FSA determines is in a relationship with an applicant which is relevant. The FSA may request information from the applicant on persons who are connected persons or are likely to become connected persons under any proposed transactions or relationships.

03/09/2001

AUTH 3.9.24

(1) As part of the application process, the FSA may request information on an applicant's controllers, directors, partners or members of its governing body. The FSA will assess whether:

(a) the applicant's controller is a fit and proper person to have control over the firm;

(b) the applicant's directors, partners and members of the governing body who will be performing controlled functions are fit and proper persons to be granted approval under the approved persons regime (see AUTH 6).

(2) An applicant (other than a Swiss general insurance company seeking to establish an agency or branch in the United Kingdom or an EEA firm, or a Treaty firmin the circumstances set out in AUTH 3.1.1 G (2) and in AUTH 3.1.1 G (3)) will be required to provide the following information about its controllers:

(a) in the case of a controller who is not an authorised person, the information required in Controllers Form A SUP 11 Annex 4) and one or more of Controllers Form B SUP 11 Annex 5) in accordance with SUP 11.3.8 D and SUP 11.3.9 D; or

(b) in all other cases, the information required in Controllers Form A, sections 1, 5 and 6 SUP 11 Annex 4).

03/09/2001

Commencing regulated activities

AUTH 3.9.25

(1) If Part IV permission is given, the FSA will expect a firm to commence its regulated activity in line with its current business plan. Applicants should take this into consideration when determining when to make an application to the FSA.

(2) Applicants should be aware that the FSA may exercise its own-initiative powers to vary or cancel a Part IV permission once granted if they do not:

(a) commence a regulated activity for which they have Part IV permission within a period of at least twelve months from the date the permission was given; or

(b) carry on a regulated activity for which they have Part IV permission for a period of at least twelve months (irrespective of the date of the grant of permission).

(3) If FSA considers that it may be appropriate to exercise its own-initiative powers to vary or cancel a firm's Part IV permission, FSA staff will discuss the proposed action with the firm and ascertain the firm's reasons for not commencing or carrying on the regulated activities concerned. Applicants are advised to discuss any problems about commencing a regulated activity with the Enquiries and Applications Department (Applications team).

01/07/2003

When will the FSA grant an application for Part IV permission?

AUTH 3.9.26

(1) The FSA will assess the information provided in the application process. As noted in AUTH 3.8.1 G, the FSA is required, by section 41(2) of the Act, to ensure that an applicant will satisfy, and continue to satisfy, the threshold conditions in relation to all the regulated activities for which the applicant is seeking Part IV permission. However, section 41(3) of the Act states that the FSA's duty under section 41(2) of the Act does not prevent it, having regard to that duty, from taking such steps as it considers necessary in relation to a particular applicant, to secure the consumer protection objective.

(2) As part of the assessment of whether an applicant satisfies and will continue to satisfy the threshold conditions, the FSA will consider whether the applicant is ready, willing and organised to comply with the regulatory requirements to which it will be subject if it is granted Part IV permission to carry on the regulated activities referred to in its application.

(3) The FSA will give Part IV permission in respect of some categories of regulated activity only if the applicant can meet specific requirements. For example, Part IV permission including advising on pension transfers and pension opt-outs and will only be granted to applicants that will have persons (or individuals) qualified to advise in this area.

03/09/2001

AUTH 3.9.27

As noted in AUTH 3.6 and AUTH 3.7, the FSA may decide to grant an application for Part IV permission including appropriate limitations or requirements. Where the FSA imposes limitationsor requirements on a Part IV permission that were not applied for by the applicant, their precise nature will depend on the circumstances of each application. During the application process, the FSA will discuss with applicants any limitations or requirements it is considering imposing but which they have not applied for. The applicant may ask the FSA to reconsider its preliminary views on any such limitations or requirements in the course of the application process.

03/09/2001

AUTH 3.9.28

In some cases, the FSA would be minded to grant an application for Part IV permission as long as certain conditions are fulfilled. As an example, the FSA may advise an applicant that it is minded to grant its application subject to the applicant providing proof that its share capital or its required financial resources are in place or that it has satisfied an outstanding element of its business plan. Part IV permission will not, however, be given until the FSA is content that its conditions have been satisfied by the applicant and, as a result, the applicant satisfies the threshold conditions. Applicants are welcome to discuss with the Enquiries and Applications Department (Applications team) the circumstances in which the FSA may be prepared to determine an application subject to such conditions being met.

01/07/2003

Other powers relating to the scope of Part IV permission

AUTH 3.9.29

(1) In determining an application for Part IV permission, the FSA may:

(a) specify a narrower or wider description of regulated activity than that for which Part IV permission was originally sought; or

(b) give Part IV permission for a regulated activity which was not originally applied for.

(2) Occasionally, the FSA expects to use its power to give Part IV permission for an applicant to carry on a regulated activity for which it did not originally apply. This might happen when, as a result of correspondence and discussion with an applicant, it becomes clear that it needs Part IV permission to carry on different categories of activities or activities relating to different categories of specified investments than those it had originally applied for.

(3) The Insurance Directives set out minimum information requirements for an application for authorisation which include information on the specified investments the applicant proposes to deal in. If these requirements are not met, the FSA may not be able to use the power described in AUTH 3.9.29 G (1)(b).

03/09/2001

How long will an application take?

AUTH 3.9.30

(1) Under Part IV of the Act, the FSA has six months from the date of receipt of a completed application to make its determination.

(2) When the FSA receives an application which is incomplete, that is, when information or documents required to be submitted as part of the application are not provided, Part IV of the Act requires the FSA to determine that incomplete application, in any event, within twelve months of the initial receipt of the application.

(3) Within these time limits, however, the length of the process will relate directly to the complexity of the application. The FSA publishes standard response times on its web site at www.fsa.gov.uk, setting out how long the application process is expected to take in practice, and, from time to time, the FSA publishes its performance against these times.

(4) Unless it considers it is appropriate to do so, the FSA will not grant an application for Part IV permission until it has had the opportunity to review all the information and documents which it has requested in connection with the application (whether as part of the application or at a later date).

03/09/2001

How will FSA make the decision?

AUTH 3.9.31

AUTH 8 (Determining applications) gives an overview of how the FSA will determine an application. The FSA's decision making procedures are in DEC and include the procedures the FSA will follow if it proposes to refuse an application for Part IV permission or grant an application subject to limitations or requirements not applied for.

03/09/2001

Withdrawal of applications

AUTH 3.9.32

An applicant may withdraw its application at any time before the application is granted or refused by giving written notice to the FSA. This written notice should be signed by a person with appropriate authority to bind the applicant.

03/09/2001

Authorised status

AUTH 3.9.33

(1) The Act states that an applicant which does not qualify for automatic authorisation by, or under, the Act, becomes authorised automatically if the FSA grants it Part IV permission.

(2) When the FSA grants an application for Part IV permission, it will inform the applicant by written notice, stating the date on which the permission takes effect.

03/09/2001

AUTH 3.10

The FSA register

01/12/2004

AUTH 3.10.1

(1) Section 347 of the Act (The record of authorised persons etc) requires the FSA to maintain a public record containing certain details about all firms, including information as to the services they hold themselves out as able to provide.

(2) When the FSA grants an application for Part IV permission, it will update the FSA Register with a general description of the regulated activities the firm has permission to carry on.

(3) The FSA register can be accessed at www.fsa.gov.uk.

03/09/2001

AUTH 3.11

Specific obligations: partnerships or unincorporated associations

01/12/2004

AUTH 3.11.1

Section 32 of the Act (Partnerships and unincorporated associations) treats all partnerships and unincorporated associations as if they were legal persons for the purposes of the grant of Part IV permission (Scottish partnerships already have the status of a legal person as have limited liability partnerships). So, where a partnership or unincorporated association proposes to carry on a regulated activity, the application for Part IV permission should be made in the name of the partnership or unincorporated association. However, a partnership should consider by whom the regulated activity will be carried on. If a partner carries on the regulated activity independently from the partnership, and not in his capacity as a partner, that person would need authorisation in his own right. The person may, for example, manage the assets of the partnership in his own name rather than in the name of the partnership. In such cases, the authorisation of the partnership itself would not, or may not, be necessary.

01/07/2003

AUTH 3.11.2

(1) Once a partnership or an unincorporated association is authorised by the FSA, then under section 32 of the Act:

(a) it is authorised to carry on the regulated activities concerned in the name of the partnership or unincorporated association; and

(b) its authorisation is not affected by any change in its membership as long as the substantive continuity test described in (2) is met.

(2) If a partnership or unincorporated association is dissolved, its authorisation continues to have effect in relation to any partnership or unincorporated association which succeeds to the business of the dissolved partnership or unincorporated association, as long as:

(a) the members of the resulting partnership or unincorporated association are substantially the same as those of the dissolved partnership or unincorporated association; and

(b) the succession is to the whole or substantially the whole of the business of the dissolved partnership or unincorporated association.

03/09/2001

AUTH 3.11.3

The treatment of partnerships described in AUTH 3.11.1 G and AUTH 3.11.2 G does not apply to a partnership which is a body corporate, that is, a limited liability partnership or any other partnership which is a body corporate and is constituted under the law of any place outside the United Kingdom.

03/09/2001

AUTH 3.11.4

Further guidance on the specific issues that arise for applicants that are limited partnerships under the Limited Partnerships Act 1907 or limited liability partnerships is in AUTH 3.22 (Specific issues: applicants that are limited partnerships under the Limited Partnerships Act 1907) and AUTH 3.23 (Specific issues: applicants that are limited liability partnerships).

01/07/2003

AUTH 3.12

Specific obligations: applicants seeking to carry on insurance business

01/12/2004

AUTH 3.12.1

Under threshold condition 1 (Legal status) (see COND) and additional restrictions imposed under the Insurance Directives, an applicant seeking Part IV permission to carry on the regulated activities of effecting or carrying out contracts of insurance must be an incorporated company other than a limited liability partnership, a registered friendly society or a registered industrial and provident society.

15/11/2001

AUTH 3.12.2

An applicant seeking to carry on insurance business should note the restrictions in PRU 7.6.13 R which relate to the carrying on of other commercial business.

31/12/2004

AUTH 3.12.3

(1) As a result of these restrictions, the FSA will grant an applicant seeking to carry on insurance business Part IV permission for insurance business, and any other regulated activities, only to the extent they are not restricted under PRU.

(2) For example, it may be appropriate for an applicant to apply for the regulated activity of accepting deposits. Also, an applicant seeking to carry on long-term insurance business may need to apply for certain designated investment business activities arising directly from the long-term insurance business it proposes to carry on. If the FSA gives an applicant Part IV permission for insurance business and other regulated activities, these other regulated activities will be subject to limitations, as appropriate, so as to comply with PRU 7.6.13 R.

31/12/2004

AUTH 3.12.4

Applicants should also be aware that the FSA will not grant Part IV permission to carry on both long-term and general insurance business, unless:

(1) the applicant's business will be restricted to reinsurance; or

(2) the applicant's general insurance business will be restricted to accident or sickness contracts (or both).

03/09/2001

Friendly societies and reinsurance

AUTH 3.12.5

Friendly societies are subject to the conditions and restrictions on reinsurance business under the Friendly Societies Act 1974 (registered friendly societies) and the Friendly Societies Act 1992 (incorporated friendly societies). A registered friendly society or an incorporated friendly society may only effect and carry out contracts of reinsurance if the conditions and restrictions set out in the relevant Friendly Societies Act are met. These include that:

(1) the approval of the actuary of the friendly society (A) is required;

(2) the friendly society is carrying on (and continues to carry on) direct insurance business of the same class; and

(3) the reinsurance is provided only to another friendly society (B).

The FSA will, therefore, not grant a friendly society a Part IV permission to carry on pure reinsurance business.

03/09/2001

Contracts written on an ancillary and supplementary basis

AUTH 3.12.6

Part IV permission to effect or carry out certain classes of contracts of insurance includes permission to effect or carry out certain classes of general insurance contracts on an ancillary or supplementary basis. In applying for Part IV permission to carry on insurance business, applicants will need to determine the specified investments for which Part IV permission will be necessary, having regard to whether certain classes of contract may qualify to be effected or carried out on an ancillary or supplementary basis. If they do, there is no need to apply for Part IV permission to effect or carry out those contracts (that is, the contracts which are eligible to be effected or carried out on an ancillary or supplementary basis) and an applicant should not do so.

03/09/2001

AUTH 3.12.7

Part IV permission to effect or carry out life and annuity contracts includes permission to effect or carry out accident or sickness contracts (or both) on a supplementary basis (see article 1(1)(c) of the First Life Directive).

03/09/2001

AUTH 3.12.8

Part IV permission to effect or carry out any class of general insurance contract includes permission to effect or carry out any other class of general insurance contract on an ancillary basis other than credit, suretyship or, except as provided in AUTH 3.12.9 G, legal expenses insurance (see part C of the Annex to the First Non-Life Directive). However, a friendly society may not effect or carry out any general insurance contracts, whether or not on an ancillary basis, other than those permitted under the Friendly Societies Act 1992.

03/09/2001

AUTH 3.12.9

Part IV permission to effect or carry out any class of general insurance contract includes permission to effect or carry out legal expenses contracts when AUTH 3.12.10 G is met and:

(1) if the main risk relates solely to the provision of assistance provided for persons who fall into difficulties while travelling, while away from home or while away from their permanent residence; or

(2) where it concerns disputes or risks arising out of, or in connection with, the use of sea-going vessels.

03/09/2001

AUTH 3.12.10

A contract of insurance will qualify to be effected or carried out on an ancillary basis if:

(1) the business in question is to be the subject of the same contract as the principal business and concerns the same object; and

(2) the risks covered are connected to the principal risk.

03/09/2001

AUTH 3.12.11

In determining the classes of specified investments for which Part IV permission is required, and those which may qualify to be written on an ancillary or supplementary basis, an applicant may need to take professional advice and may also wish to discuss this with a member of the Enquiries and Applications Department (Applications team).

01/07/2003

AUTH 3.12.12

The application for Part IV permission will need to provide information about the insurance business to be carried on by the applicant in the classes of specified investments for which Part IV permission is requested and also that qualifying to be carried on on an ancillary or supplementary basis.

03/09/2001

Reporting requirements

AUTH 3.12.13

An applicant for Part IV permission which includes insurance business should be aware that specific reporting requirements apply during its first three years of operation (see SUP App 2)

03/09/2001

Applicants seeking to carry on insurance business with a head office outside the United Kingdom (other than EEA firms or Treaty firms)

AUTH 3.12.14

In addition to AUTH 3.18, where an applicant for Part IV permission which has its head office outside the United Kingdom seeks to carry on insurance business in the United Kingdom, the following guidance is of relevance.

03/09/2001

AUTH 3.12.15

An applicant which has its head office outside the United Kingdom (other than an EEA firm, Treaty firm or a Swiss general insurance company) should note the requirement in IPRU(INS) 8.3R to appoint a chief executive (that is, the person who alone or jointly with one or more others, is responsible for the conduct of its business in the United Kingdom) and an authorised UK representative (see COND 2.6 (Additional Conditions) for the additional conditions which apply to non-EEA insurers and SUP 15.4 (Notified persons) for rules on notifications by overseas firms).

31/12/2004

AUTH 3.12.16

A Swiss general insurance company seeking to establish a branch in the United Kingdom should note the requirement referred to in COND 2.6.1 D to appoint an authorised UK representative for the United Kingdom.

31/12/2004

AUTH 3.12.17

An applicant with its head office outside the United Kingdom (other than an EEA firm or a Treaty firm) seeking permission to carry on direct or both direct and reinsurance business in the United Kingdom should note that specific prudential requirements apply PRU).

31/12/2004

AUTH 3.13

Specific obligations: applicants seeking to carry on the regulated activities of accepting deposits or issuing electronic money

01/12/2004

AUTH 3.13.1

Under threshold condition 1 (Legal status), an applicant who seeks to carry on the regulated activities of accepting deposits or issuing electronic money must be either a body corporate or a partnership (see COND).

27/04/2002

AUTH 3.14

Specific obligations: applicants seeking to hold or control client money

01/12/2004

AUTH 3.14.1

Unlike safeguarding and administering assets, holding or controlling client money is not a regulated activity in the Regulated Activities Order. As in AUTH 3.7.3 G, the FSA controls this activity by using requirements on a firm's Part IV permission.

03/09/2001

AUTH 3.14.2

(1) An applicant seeking to hold or control client money must complete the relevant sections of the application forms for Part IV permission. The applicant must be able to demonstrate to the FSA that it can satisfy, and continue to satisfy, the threshold conditions (see AUTH 3.8.1 G to AUTH 3.8.3 G) should the application for Part IV permission be granted. This will include demonstrating that it is ready, willing and organised to comply with the relevant requirements in CASS 4 (Client money).

(2) If an applicant is not able to demonstrate to the FSA that it can satisfy, and continue to satisfy, the threshold conditions to hold or control client money, but its application for Part IV permission is granted, the FSA will impose a requirement on the permission to the effect that the firm will not be able to hold, or control, client money.

03/09/2001

AUTH 3.15

Specific obligations: applicants seeking to manage PEPS or ISAS

01/12/2004

AUTH 3.15.1

Management of PEPs and ISAs, in themselves, are not regulated activities in the Regulated Activities Order although the activities carried on by a firm in relation to PEP and ISA management constitute regulated activities. As a result, where the firm has Part IV permission which includes the regulated activities which would otherwise permit the firm to manage a PEP or an ISA, the FSA controls participation in these activities by using requirements on the firm's permission (see AUTH 3.7.3 G).

03/09/2001

AUTH 3.15.2

(1) An applicant seeking to manage PEPs or ISAs must complete the relevant sections of the application forms for Part IV permission, specifying the types of ISA and their constituent components which it intends to manage. An applicant should check that the regulated activities for which it is seeking permission will permit it to carry on the proposed activities in respect of the component concerned (for example, one of the sub categories of safeguarding and administering assets of the component includes equities) and:

(a) consider whether it needs to hold or control client money (see AUTH 3.14) if it has not applied for permission including accepting deposits; or

(b) have plans to put in place contractual provisions under which it will receive client money as agent for an approved bank so that any loss in relation to the ISA cash component will be compensated for by that approved bank or the compensation scheme.

(2) Cash ISAs raise particular issues. Applicants may find it helpful to seek an independent legal opinion on their proposals before they proceed and may wish to discuss their proposals with the FSA.

03/09/2001

AUTH 3.15.3

Applicants should also be aware that a firm wishing to act as an ISA or PEP manager will have to obtain approval from the Inland Revenue as an account manager under the Inland Revenue regulations.

03/09/2001

AUTH 3.15.4

To manage ISAs or PEPs, an applicant must be able to demonstrate to the FSA that it can satisfy and continue to satisfy the threshold conditions should the application for Part IV permission be granted. This will include demonstrating that it is ready, willing and organised to comply with the relevant regulatory and Inland Revenue requirements.

03/09/2001

AUTH 3.15.5

If an applicant is not able to demonstrate to the FSA that it is able to comply with those obligation, the FSA will impose a requirement on the firm's permission to the effect that the firm will not be able to manage PEPs or ISAs.

03/09/2001

AUTH 3.16

Specific obligations: applicants seeking to establish, operate or wind up a stakeholder pension scheme

01/12/2004

AUTH 3.16.1

Applicants should be aware that, in addition to requiring permission from the FSA to establish, operate or wind up a stakeholder pension scheme, a firm will need to obtain exempt approval of the stakeholder pension scheme from the Inland Revenue and to register the scheme with the Occupational Pensions Regulatory Authority.

03/09/2001

AUTH 3.16.2

Establishment and operation of a stakeholder pension scheme may involve heavy investment in new systems or changes to existing systems which, in view of the limit on charges, might not be recovered for some time. So, the FSA will normally require an applicant wishing to establish, operate or wind up a stakeholder pension scheme to provide financial projections for the whole period up to the point at which the new business is expected to break even. The applicant must also be able to demonstrate to the FSA that it is ready, willing and organised to comply with the requirements (including those in COB 5, COB 6 and TC 2) applicable to operation of a stakeholder pension scheme.

03/09/2001

AUTH 3.17

Specific obligations: applicants seeking to establish a collective investment scheme or to act as manager of a regulated collective investment scheme

01/12/2004

AUTH 3.17.1

An applicant seeking to establish a collective investment scheme should consult COLL and CIS for detailed requirements and guidance. Applicants should note that until 12 February 2007 they may elect to comply with COLL or CIS, although qualified investor schemes have to comply with COLL.

01/04/2004

AUTH 3.17.2

Applicants seeking to establish a collective investment scheme or to act as manager of a regulated collective investment scheme should note the rules in COLL 6.3.9 (Plan registers) and CIS 6.5 (Plan registers), which implements article 6 of the UCITS Directive and restrict the activities of a manager of an authorised unit trust which is a UCITS scheme.

01/04/2004

AUTH 3.17.3

An applicant which wishes to act as a UCITS management company should note the restriction on the activities it may engage in (see COLL 6.9.9 Restrictions of business of UCITS management companies) and CIS 16.5 (Restrictions of business of UCITS management companies).

01/04/2004

AUTH 3.17.4

A firm which is subject to the rule in COLL 6.9.9 or CIS 16.5 may, in addition, carry on 'connected activities' referred to in COLL 6.6.11 and CIS 16.5, which include management of PEPs, ISAs and stakeholder pension schemes, as long as they are dedicated to investments in unit trusts and OEICs for which the firm acts as manager or ACD. The Enquiries and Applications Department (Applications team) would be pleased to discuss any other activities which potential applicants consider may be connected.

01/04/2004

AUTH 3.18

Specific obligations: additional considerations for applicants (other than EEA firms or Treaty firms) with a head office in a country of territory outside the United Kingdom seeking to establish a branch in the United Kingdom

01/12/2004

AUTH 3.18.1

This section applies to applicants identified in AUTH 3.1.1 G (1) (excluding a Swiss general insurance company). The exercise of EEA rights or Treaty rights by EEA firms or Treaty firms is dealt with separately in AUTH 5.

03/09/2001

AUTH 3.18.2

The FSA must always assess whether an applicant for Part IV permission as a whole will satisfy, and continue to satisfy, the threshold conditions. This applies even though an applicant for Part IV permission may have its head office outside the United Kingdom. In other words, the FSA will not just assess the circumstances of any proposed branch in the United Kingdom. In making this assessment of the applicant for Part IV permission as a whole, the FSA will take into account all relevant matters, including the extent to which the applicant is regulated in its home state. The FSA would seek to liaise with any home state regulator and would take into account information from it with respect to, for example, the adequacy of the applicant's resources and the applicant's suitability, having regard to the need to ensure that the applicant's affairs are conducted soundly and prudently. Information with respect to the conduct of the applicant's affairs would extend in particular to the adequacy of the internal control systems under SYSC.

03/09/2001

AUTH 3.18.3

The FSA's regulatory requirements, including PRU and IPRU, will apply to a firm in full and worldwide, unless otherwise stated. Where necessary, waivers, limitations and requirements will be used to ensure that appropriate prudential requirements apply to the branch, taking into account the home state supervisory arrangements and the particular circumstances of an applicant.

31/12/2004

AUTH 3.18.4

If the FSA considers that the applicant may be unable to satisfy the threshold conditions and that this cannot be addressed by the use of limitations and requirements, the FSA would have to conclude that a branch presence in the United Kingdom would be inappropriate. In such circumstances, the applicant may wish to consider forming a UK incorporated subsidiary as an alternative method of obtaining a presence in the United Kingdom.

03/09/2001

AUTH 3.19

Specific obligations: applications in connection with group-restructuring

01/12/2004

AUTH 3.19.1

Where an application for Part IV permission is to be made as part of the restructuring of a group which includes, or will include, one or more firms, the group's plans should be discussed with the supervisor or lead supervisor for the group at the FSA. This is particularly important where a group intends to transfer business into a new entity from a firm in its group and then wishes to apply for cancellation of that firm's Part IV permission.

03/09/2001

AUTH 3.19.2

The application for Part IV permission for the new entity should be submitted to the Enquiries and Applications Department (Applications team) with details of the group and any business the group proposes to transfer. Applicants should note that particular requirements apply to transfers of insurance business, or if the business includes accepting deposits.

01/07/2003

AUTH 3.19.3

If applications for Part IV permission and for cancellation of Part IV permission (see SUP 6) have been submitted, then the Enquiries and Applications Department (Applications team) will liaise with the lead supervisor, who will liaise with the group in respect of its applications. Although the group will need to obtain Part IV permission for the new entity first, the FSA will endeavour to process, if possible, the other applications at the same time.

01/07/2003

AUTH 3.19.4

Statutory procedures apply to the transfer of insurance business or banking business (see SUP 18).

03/09/2001

AUTH 3.20

Specific obligations: applicants seeking to establish a branch in, or provide services into, another EEA State

01/12/2004

AUTH 3.20.1

Certain firms (known as UK firms) may establish branches in, or provide cross border services into, other EEA States exercising rights under one of the Single Market Directives (this is often referred to as passporting). A firm may also have rights under the Treaty.

03/09/2001

AUTH 3.20.2

An applicant for Part IV permission that wishes, if the FSA grants the permission, to passport into another EEA State on, or shortly after, being given permission, is advised to contact the Corporate Authorisation department to discuss its plans (see AUTH 3.9.4 G (2) for contact details).

01/07/2003

AUTH 3.20.3

(1) SUP 13 (Exercise of passport rights by UK firms) gives guidance on the procedures to be followed by a UK firm to establish a branch in, or provide cross border services into, another EEA State. SUP 13 Annex 3 contains guidance on the Single Market Directives, including guidance on which firms are entitled to passport.

(2) COLLG 2 and CIS 2.3.4 G gives guidance when an operator of a UCITS wishes to market its scheme in another EEA State.

(3) Firms wishing to exercise rights under the Treaty in another EEA State should seek guidance from the FSA in the first instance.

01/04/2004

AUTH 3.20.4

An applicant may submit a separate notice of intention to passport (see SUP 13.6.4 G and SUP 13.7.3 G) with its application for Part IV permission. The notice of intention will be reviewed with the application for Part IV permission. The FSA is not, however, able to issue a consent notice (see SUP 13.6.10 G), or send a notice of intention (see SUP 13.7.9 G), to the relevant Host State regulators unless or until an applicant is authorised. As a result, an applicant seeking to establish a branch in another EEA State will not be able to satisfy the conditions in the Act for establishing a branch (see SUP 13.6.2 G) until after authorisation.

01/07/2003

AUTH 3.20.5

An applicant should note, however, that the business plans and financial projections and, where relevant, scheme of operations submitted with its application for Part IV permission should reflect any passported activity (and any branches outside the EEA) that the firm plans to commence in the immediate future.

03/09/2001

AUTH 3.21

Treaty firms applying for Part IV Permission

01/12/2004

AUTH 3.21.1

The Treaty establishing the European Community provides firms with rights of establishment, under article 43, and the right to provide services under article 49. These rights can be exercised anywhere in any other State in the EEA.

21/02/2002

AUTH 3.21.2

Treaty firms which do not have, or do not wish to exercise, a treaty right to carry on a regulated activity in the United Kingdom, and which do not have an EEA right to passport in relation to that activity, must seek Part IV permission to do so (see AUTH 5.4.3 G to AUTH 5.3.13 G).

21/02/2002

AUTH 3.21.3

Where such a treaty firm has received Home State authorisationto carry on the regulated activities that it seeks to carry on under the Part IV permission, the FSA will take this into account when considering the application.

21/02/2002

AUTH 3.21.4

These applications will be considered on a case by case basis. Applicants should contact the Enquiries and Applications Department (Applications team) (see AUTH 3.9.4 G (2) for contact details) at an early stage to discuss their plans.

01/07/2003

AUTH 3.22

Specific issues: applicants that are limited partnerships under the Limited Partnerships Act 1907

01/12/2004

AUTH 3.22.1

Limited partnerships are formed under the Limited Partnerships Act 1907, which also governs aspects of their operation. A limited partnership differs from a normal partnership in that not all the partners will be liable for all the debts and obligations of the partnership, though there must be at least one partner (the general partner) who is. The other partners (limited partners) are not permitted to be active in managing the day-to-day business of the limited partnership but may be involved only in its constitutional affairs (see section 6(1) of the Limited Partnerships Act 1907 (Modifications of general law in case of limited partnerships)).

01/07/2003

AUTH 3.22.2

Applications for Part IV permission should be in the name of the partnership (see AUTH 3.11.1 G and sections 32 (Partnerships and unincorporated associations) and 40(1)(c) (Application for permission) of the Act). This permission, if granted, will then cover the business to be carried on. Authorisation of the limited partnership will, in effect, authorise the partners when conducting the business of the partnership. However, if a partner conducts regulated activities separately from the limited partnership, this may trigger a need for the partner to seek authorisation independently. Thus, if the general partner seeks to manage the assets of the limited partnership by conducting business in his name (rather than as a partner in the name of the limited partnership), the general partner will need to be authorised . This is if the activities he carries on amount to managing investments or another regulated activity. In the case of a limited partnership therefore, the authorisation of the partnership itself may not always be appropriate or sufficient. The key question is how and by whom the regulated activities will be carried on. So, the scope of the application will differ depending on which regulated activities the applicant wishes to undertake (see AUTH 3.22.3 G to AUTH 3.22.4 G).

01/07/2003

AUTH 3.22.3

The limited partnership may be set up to invest the funds of the partners, for example, in the way of a venture capital fund. If so, it will usually be a collective investment scheme. The partnership will not require authorisation simply for being a collective investment scheme as this is not a regulated activity. It will also often be the case that the partnership, in investing its assets, will be excluded from the regulated activity of dealing in investments as principal (see AUTH 2.8.4 G (Dealing in investments as principal)). However, it is likely that the general partner will require permission from the FSA to establish, operate or wind up a collective investment scheme (see AUTH 3.17 (Specific obligations: applicants seeking to establish a collective investment scheme or to act as manager of a regulated collective investment scheme) and COLL and CIS). If the general partner delegates responsibility for operating a limited partnership that is a collective investment scheme to another person on behalf of the partnership, that other person will require authorisation from the FSA (whether or not the general partner also requires authorisation).

01/04/2004

AUTH 3.22.4

Where the limited partnership intends to manage the investments of third parties rather than the capital contributions of the partners, the limited partnership itself may require permission from the FSA. This is because it is likely to be carrying on the regulated activity of managing investments and may be carrying on other regulated activities as well. A typical example of this kind of limited partnership would be a hedge fund scheme.

01/07/2003

AUTH 3.22.5

If the limited partnership is a collective investment scheme, neither the limited partnership itself (if authorised) nor the general partner (if authorised) will be within the scope of the ISD in respect of its management of the scheme assets. So, neither of them will be an ISD investment firm. This is because the ISD specifically excludes from its scope collective investment undertakings and their managers and depositaries. This includes operators who manage both the scheme and its assets. However, where the management of the scheme and the assets are split, the activities of the asset manager will fall under the ISD.

01/07/2003

AUTH 3.23

Specific issues: applicants that are limited liability partnerships

01/12/2004

AUTH 3.23.1

A limited liability partnership is a body corporate incorporated under either the Limited Liability Partnerships Act 2000 or other legislation having the same effect as the Limited Liability Partnerships Act 2000. So, a limited liability partnership is a body corporate and exists as a legal person separate from its members. Any limited liability partnership that wishes to carry on a regulated activity must make its application for Part IV permission in its own name. Consequently, unlike partners in a partnership , the members of the limited liability partnership do not personally become authorised . So, the members do not have permission to conduct regulated activities in their own names. The regulated activities must be carried on by the limited liability partnership itself.

01/07/2003

AUTH 3.23.2

A limited liability partnership has some features of a limited company and some of a partnership. For example, it can have the organisational flexibility of, and is subject to a taxation regime similar to that of, a partnership. However, although the partners of a general partnership are liable personally for the obligations of the partnership, a limited liability partnership (like a limited company) is a separate legal entity that is owned by its members. It is this structure that allows members to protect their personal assets from the liabilities of the body corporate .

01/07/2003

AUTH 3.23.3

The organisational flexibility available to a limited liability partnership means that all of the members can be involved in the day-to-day management and operations of the business. This is so, even though they have limited their liability for the limited liability partnership's obligations. This may be contrasted with the position of limited partners in a limited partnership.

01/07/2003

AUTH 3.23.4

A consequence of the organisational flexibility available to a limited liability partnership is the potential for widely differing organisational structures. This means that the proposed organisational structure for an applicant for Part IV permission will need to be explained fully in the application. This will allow the FSA to give proper consideration, with the applicant, to the way in which the approved persons and financial resource requirements will apply to it. All limited liability partnerships that are making an application for Part IV permission, whether or not they have been formed under the Limited Liability Partnerships Act 2000, will need to supply this information.

01/07/2003

AUTH 3.23.5

Authorised persons wishing to exchange their existing status to that of a limited liability partnership will need to make an application for Part IV permission in the name of the new entity, and will be expected to complete an application pack for Part IV permission. A firm considering changing its existing status should contact the Enquiries and Applications Department (Applications team) (see AUTH 1.9.2 G) at an early stage for advice on what will be required.

01/07/2003

AUTH 3.24

Specific obligations: applicants wishing to operate an ATS

01/12/2004

AUTH 3.24.1

If an applicant who wishes to operate an ATS intends to assume responsibility for the clearing or settlement of transactions effected using the ATS, the applicant should provide sufficient information with its application to demonstrate that it has adequate arrangements in place to ensure efficient clearing or settlement (as the case may be) of the transactions.

01/04/2004

AUTH 3 Annex 1

Application for Part IV Permission

01/12/2004

AUTH 3 Annex 1.1

03/09/2001

AUTH 3 Annex 2

01/12/2004

AUTH 3 Annex 2.1

CHAPTER OF IPRU(INV) THAT REQUIREMENT ON PERMISSION REQUIRES THE FIRM TO COMPLY WITH

FIRM'S PRUDENTIAL CATEGORY

Chapter 3

Securities and futures firm

Chapter 5

Investment management firm

Chapter 10

Securities and futures firm

Chapter 13

Personal investment firm

The table below shows how a firm's main regulated activities determine its prudential category. A firm's 'main regulated activities' in this context are the regulated activities included in the firm's Part IV permission from which the firm derives or is expected to derive the most substantial part of its gross income, including commissions. The aggregate gross income from all of the activities listed against each prudential category should be considered to determine which source is the most substantial.
The gross income is based on the business plan submitted as part of the firm's application for a Part IV permission.

ACTIVITIES FROM WHICH THE MOST SUBSTANTIAL PART OF THE FIRM'S GROSS INCOME, INCLUDING COMMISSIONS, FROM REGULATED ACTIVITIES IS DERIVED

FIRM'S PRUDENTIAL CATEGORY

(i) Managing investments other than for private customers or where the assets managed are primarily derivatives;
(ii) OPS activity;
(iii) acting as the manager or trustee of an AUT;
(iv) acting as the ACD or depositary of an ICVC;
(v) establishing, operating or winding up a collective investment scheme other than an AUT or ICVC; and
(vi) safeguarding and administering investments.

Investment management firm

(i) Advising on investments, or arranging (bringing about) deals in investments in relation to, packaged products; and
(ii) managing investments for private customers.

Personal investment firm

ACTIVITIES FROM WHICH THE MOST SUBSTANTIAL PART OF THE FIRM'S GROSS INCOME, INCLUDING COMMISSIONS, FROM REGULATED ACTIVITIES IS DERIVED

FIRM'S PRUDENTIAL CATEGORY

(i) An activity carried on as a member of an exchange;
(ii) making a market in securities or derivatives;
(iii) corporate finance business;
(iv) dealing, or arranging (bringing about) deals in investments, in securities or derivatives;
(v) the provision of clearing services as a clearing firm;
(vi) managing investments where the assets managed are primarily derivatives; and
(vii) activities relating to spread bets;

Securities and futures firm

27/04/2002

AUTH 3 Annex 3

Determination of an applicant's prudential category

01/12/2004

AUTH 3 Annex 3.1

03/09/2001

AUTH 4

Authorisation
Fees

AUTH 4.1

Introduction

01/12/2004

Application

AUTH 4.1.1

This chapter applies to:

(1) every applicant for Part IV permission (including an incoming firm applying for top-up permission);

(2) every Treaty firm that wishes to exercise a Treaty right to qualify for authorisation under Schedule 4 to the Act (Treaty rights) in respect of regulated activities for which it does not have an EEA right; and

(3) an applicant for a certificate under article 54 of the Regulated Activities Order.

01/01/2002

AUTH 4.1.2

This chapter does not apply to:

(1) an EEA firm that wishes to exercise an EEA right; or

(2) an ICVC; or

(3) a UCITS qualifier.

01/01/2002

Purpose

AUTH 4.1.3

The purpose of this chapter is to set out the requirements on applicants for Part IV permission, and Treaty firms qualifying for authorisation under Schedule 4 to the Act (Treaty rights), to pay fees.

01/01/2002

Background

AUTH 4.1.4

GEN 3 (FSA Fees - General Provisions) applies to fees required by this chapter.

01/01/2002

AUTH 4.1.5

Most of the detail of what fees are payable by applicants and Treaty firms is set out in AUTH 4 Annex 1.

01/04/2004

AUTH 4.1.5A

AUTH 4 Annex 2 R contains details of the application fees payable by applicants seeking to obtain permission to carry out any of the activities included in the A.2 (mortgage lenders and administrators), A.18 (mortgage lenders, advisers and arrangers) and A.19 (general insurance mediation) activity groups, for the period before these activities begin to be subject to regulation.

01/01/2004

AUTH 4.1.6

The rates set for authorisation fees represent an appropriate proportion of the costs of the FSA in processing the application or exercise of Treaty rights.

01/01/2002

AUTH 4.1.7

Except as set out in AUTH 4.1.7A G, applications (and exercises of Treaty rights) are categorised by the FSA for the purpose of fee raising as complex, moderately complex and straightforward as identified in AUTH 4 Annex 1. This differentiation is based on the permitted activities sought and does not reflect the FSA's risk assessment of the applicant (or Treaty firm).

01/11/2003

AUTH 4.1.7A

For the period before the activities referred to in AUTH 4.1.5A G are subject to regulation, applications for the A.2 (mortgage lenders and administrators), A.18 (mortgage lenders, advisers and arrangers) and A.19 (general insurance mediation) activity groups are categorised by the FSA for the purpose of fee raising using a measure of the amount of business being undertaken by the person, as detailed in AUTH 4 Annex 2 R.

01/01/2004

AUTH 4.1.8

A potential applicant (or Treaty firm) has the opportunity to discuss its proposed application (or exercise of Treaty rights) with the FSA before submitting it formally (see AUTH 3.9.1 G). If an applicant (or Treaty firm) does so, the FSA will be able to use that dialogue to make an initial assessment of the fee categorisation and therefore indicate the authorisation fee that should be paid.

01/01/2002

AUTH 4.1.9

See AUTH 3.9 in relation to the procedures for making applications for Part IV permission and AUTH 5 for procedures for the exercise of Treaty rights by Treaty firms.

01/01/2002

AUTH 4.1.10

Authorisation fees are not refundable.

01/01/2002

AUTH 4.2

Obligation to Pay Authorisation Fees

01/12/2004

General

AUTH 4.2.1

A person to whom this chapter applies must pay to the FSA an authorisation fee for each application made (or exercise of a Treaty right), as set out in AUTH 4 Annex 1 and AUTH 4 Annex 2 R.

01/11/2003

Amount

AUTH 4.2.2

In respect of a particular application (or exercise) the authorisation fee referred to in AUTH 4.2.1 R is the highest of the tariffs set out in part 1 of AUTH 4 Annex 1 and part 2 of AUTH 4 Annex 2 R which apply to that application (or exercise).

01/11/2003

AUTH 4.2.3

If an application (or exercise of a Treaty right) falls within more than one category, only one fee is payable. That fee is the one for the category to which the highest fee tariff applies.

01/01/2002

Due date and method of payment

AUTH 4.2.4

The sum payable under AUTH 4.2.2 R must be paid:

(1) by bankers draft, cheque or other payable order;

(2) in full without deduction; and

(3) on or before the date on which the application is made (or notice of exercise is given).

01/01/2002

AUTH 4.2.5

The appropriate authorisation fee is an integral part of an application for Part IV permission. Any application pack received by the FSA without the accompanying appropriate authorisation fee, in full and without deduction (see AUTH 4.2.4 R), will not be treated as an application made, incomplete or otherwise, in accordance with section 51(3)(a) of the Act. Where this is the case, the FSA will contact the applicant to point out that the application cannot be progressed until the appropriate fee has been received. In the event that the appropriate authorisation fee, in full and without deduction, is not forthcoming, the application pack will be returned to the applicant and no application will have been made.

01/03/2003

Modification for certain Treaty firms

AUTH 4.2.6

If a certificate has been issued under paragraph 3(4) of schedule 4 to the Act in respect of an exercise of a Treaty right, no sum payable under AUTH 4.2.2 R.

01/01/2002

AUTH 4.2.7

If no certificate has been issued under paragraph 3(4) of schedule 4 to the Act in respect of an exercise of a Treaty right, the sum payable is as specified in Part 4 of AUTH 4 Annex 1.

01/01/2002

AUTH 4.3

Obligation to pay certification fees

01/12/2004

General

AUTH 4.3.1

An applicant for a certificate under article 54 of the Regulated Activities Order must pay to the FSA the application fee specified in Part 6 of AUTH 4 Annex 1.

15/11/2001

Due date and method of payment

AUTH 4.3.2

The application fee must be paid:

(1) by bankers draft, cheque or other payable order;

(2) in full without deduction; and

(3) on or before the date on which the application is made.

15/11/2001

AUTH 4.3.3

An application for an article 54 certificate will be treated as incomplete until the application fee has been paid.

15/11/2001

AUTH 4 Annex 1

Authorisation fees payable

01/12/2004

Application type (see Part 2)

Amount payable

(a) Credit unions - registration of common bond

£200

(b) Version 1 credit unions - authorisation

£300

£1,800

(d) Straightforward

£1,500

(e) Moderately complex

£5,000

(f) Complex

£25,000

Straightforward cases

Activity grouping

Description

A.3

Friendly societies only

A.4

Friendly societies only

A.12

Advisory arrangers, dealers or brokers (holding or controlling client money and/or assets)

A.13

Advisory only firms and advisory arrangers, dealers or brokers (not holding or controlling client money and/or assets)

A.14

Corporate finance advisers

A.18

Mortgage lenders, advisers and arrangers (excluding mortgage lenders)

A.19

General insurance mediation

Moderately complex cases

Activity grouping

Description

A.1

E-money issuers only

A.2

Mortgage lenders and administrators

A.5

Managing agents at Lloyd's

A.7

Fund managers

A.9

Operators, trustees and depositaries of collective investment schemes

A.10

Firms dealing as principal

Service companies

Complex cases

Activity grouping

Description

A.1

Deposit acceptors (excluding e-money issuers and credit unions)

A.3

Insurers - general (excluding friendly societies)

A.4

Insurers - life (excluding friendly societies)

The fee payable under SUP 6.3.22 R is 50% of that payable under AUTH 4.2.2 R.There are no circumstances specified for the purposes of SUP 6.3.22 R (2).

If the Treaty firm wishes to undertake the permitted activities in question through its branch in the United Kingdom, the fee is 50% of the fee that would be payable under AUTH 4.2.2 R.
If the Treaty firm wishes to undertake the permitted activities in question by providing services in the United Kingdom, the fee is 25% of the fee which would be payable under AUTH 4.2.2 R.

The activity group definitions are set out in SUP 20 Annex 1.

The amount payable in relation to each application is £2,000.

03/09/2001

AUTH 4 Annex 2

Authorisation fees payable in relation to the A.2 and A.18 activity groups up to and including 30 October 2004 and the A.19 activity group up to and including 13 January 2005

01/12/2004

Note: This annex specifies the application fees for applicants seeking to apply for Part IV permission, or to vary their existing Part IV permission, in order to undertake any of the activities specified in the A.2, A.18 and A.19 activity groups (see Part 1 of SUP 20 Annex 1 for details of the activities).

For the permitted activities included in the A.2 and A.18 activity groups, regulation commences on 31 October 2004. Regulation commences on 14 January 2005 for the permitted activities included in the A.19 activity group.

The fee rules set out in this annex will apply from the beginning of the application period until regulation of these permitted activities commences. At that time, these rules will cease to have effect and application fees for these types of permitted activities will be dealt with alongside the other authorisation fees as part of AUTH 4 Annex 1.

1. For the A.2 and A.18 activity groups, these rates apply up to and including 30 October 2004.
2. For the A.19 activity group, these rates apply up to and including 13 January 2005.

Activity group

Amount payable

Fee bands

Fee - early applications

Fee - other applications

Discount - electronic applications

Discount - non-electronic applications paying by direct debit

Band no.

Band

A.2 Mortgage lenders and administrators

1
2
3
4

Gross advances (£m)
0-10
>10-100
>100-1,000
>1,000

Fee (?)
600
8,000
13,000
23,000

Fee (?)
1,200
10,000
15,000
25,000

Discount (£)
100
250
250
500

Discount (£)
50
50
50
50

A.18 Mortgage lenders, advisers and arrangers; and
A.19 General insurance mediation

5
6
7
8

Annual income (£m)
0 - 1
>1-3
>3-25
>25

Fee (?)
600
4,250
9,000
23,000

Fee (?)
1,200
5,750
11,000
25,000

Discount (£)
100
250
250
500

Discount (£)
50
50
50
50

(1)

An early application is an application lodged:

(a)

for A.2 or A.18 applications, before 1 April 2004; and

(b)

for A.19 applications, before 1 June 2004.

(2)

For the purposes of this table:

(a)

An electronic application is one submitted via the electronic facility provided by the FSA for these purposes.

(b)

Gross advances means the value of all new mortgage advances made (not the total mortgage balances outstanding) including loans for house purchase, remortgages, further advances and top-up loans, in the 12 months to 31 December 2003; PLUS

the value of all new mortgages administered (not the total mortgage balances outstanding) including loans for house purchase, remortgages, further advances and top-up loans, in the 12 months to 31 December 2003, multiplied by 0.5.

Note: For this purpose, a mortgage is a contract for a loan secured by a first charge over residential property in the United Kingdom.

(3)

For the purposes of this table, annual income means:

(a)

the net amount retained by the firm of all brokerages, fees, commissions and other related income (e.g. administration charges, overriders, profit shares) due to the firm in respect of or in relation to:

(i)

activities which would be mortgage mediation activity if they had been carried out after 30 October 2004; PLUS

(ii)

activities which would be insurance mediation activity (in relation to general insurance contracts or pure protection contracts) if they had been carried out after 13 January 2005;

earned in its latest financial year ending on or before 31 December 2003;

PLUS

(b)

(i)

in relation to the activities set out in (a)(i), for any mortgage mediation activity carried out by the firm for which it receives payment from the lender on a basis other than that in (a), the value of all new mortgage advances resulting from that activity multiplied by 0.004;

PLUS

(ii)

If the firm is a mortgage lender, the value of all new mortgage advances which would be regulated mortgage contracts if they had been made after 30 October 2004 (other than those made as a result of mortgage mediation activity by another firm), multiplied by 0.004;

for its latest financial year ending on or before 31 December 2003;

PLUS

(c)

in relation to the activities set out in (a)(ii):

(i)

for any insurance mediation activity carried out by the firm for which it receives payment from the insurer on a basis other than that in (a), the amount of premiums receivable on the contracts of insurance resulting from that activity multiplied by 0.07; PLUS

(ii)

if the firm is an insurer, the amount of premiums receivable on its contracts of insurance multiplied by 0.07, excluding those contracts of insurance which:

(aa)

result from insurance mediation activity by another firm, where a payment has been made by the insurer to the firm under (a); or

(ab)

the insurer reports, and pays a fee on, in the A.4 activity group; or

(ac)

are not general insurance contracts or pure protection contracts;

for its latest financial year ending on or before 31 December 2003.

The firm must include in its income calculation, on the same basis as above, earnings from those who will become its appointed representatives immediately after authorisation.

In note (3), a reference to a "firm" also includes reference to any person who carried out activities which would be;

(1)

mortgage mediation activity if they had been carried out after 30 October 2004; or

(2)

insurance mediation activity (in respect of general insurance contracts or pure protection contracts) if they had been carried out after 13 January 2005.

The activity group definitions are set out in SUP 20 Annex 1.

03/09/2001

AUTH 5

Qualifying for authorisation under the Act

AUTH 5.1

Application and purpose

01/12/2004

AUTH 5.1.1

(1) This chapter applies to an EEA firm that wishes to exercise an entitlement to establish a branch in, or provide cross border services into, the United Kingdom under a Single Market Directive. (The Act refers to such an entitlement as an EEA right and its exercise is referred to in the Handbook as "passporting"). (See SUP App 3 (Guidance on passporting issues) for further guidance on passporting).

(2) The chapter also applies to:

(a) a Treaty firm that wishes to exercise rights under the Treaty in respect of regulated activities not covered by the Single Market Directives and qualify for authorisation under Schedule 4 to the Act (Treaty Rights); and

(b) a UCITS qualifier, that is, an operator, trustee or depositary of a recognised collective investment scheme, constituted in another EEA State, and which qualifies for authorisation under Schedule 5 to the Act (Persons concerned in collective investment schemes).

(3) The provisions implementing the Single Market Directives are within the coordinated field (see AUTH 2.9.18 G (1) ). So, where an incoming ECA provider intends to provide electronic commerce activity that consist of activities that fall within one of the Single Market Directives, the passporting requirements on exercising an EEA right in this chapter will apply.

01/07/2003

AUTH 5.1.2

This chapter does not apply to:

(1) an EEA firm that wishes to carry on in the United Kingdom activities which are outside the scope of its EEA right and the scope of a permission granted under Schedule 4 to the Act; in this case the EEA firm requires a "top-up permission" under Part IV of the Act and `should refer to AUTH 3 (Applications for Part IV permission); or

(2) a person participating in a community co-insurance operation by the provision of services and otherwise than as leading insurer, carrying on any insurance activity; by virtue of Article 11 of the Regulated Activities Order Community co-insurance operation is treated as authorised on completion by the leading insurer of the requirements of Schedule 3 to the Act.

(3) a Treaty firm that wishes to provide electronic commerce activities into the United Kingdom.

21/08/2002

AUTH 5.1.3

(1) Under The Gibraltar Order made under section 409 of the Act (Gibraltar), a Gibraltar firm is treated as an EEA firm under Schedule 3 to the Act if it is:

(a) authorised in Gibraltar under the Insurance Directives; or

(b) authorised in Gibraltar under the Banking Consolidation Directives.

(2) A Gibraltar insurance company is allowed to passport its services into the United Kingdom if it complies with the relevant notification procedures. Similarly, a Gibraltar credit institution is allowed to passport into the United Kingdom to provide banking services provided those services fall within items 1 to 6 in Annex 1 to the Banking Consolidation Directive. So, any references in this chapter to EEA State or EEA right include references to Gibraltar and the entitlement under the Gibraltar Order where appropriate.

(3) The entitlement in the Gibraltar Order does not, however, extend to investment services as Gibraltar investment firms have not been granted the right to passport into the United Kingdom.

01/12/2001

Purpose

AUTH 5.1.4

(1) This chapter explains how an EEA firm and a Treaty firm can qualify for authorisation under Schedules 3 and 4 to the Act and how a UCITS qualifier is authorised under Schedule 5 to the Act.

(2) This chapter also provides guidance on Schedule 3 to the Act for an incoming EEA firm that wishes to establish a branch in the United Kingdom instead of, or in addition to, providing cross border services into the United Kingdom or vice versa.

01/12/2001

AUTH 5.1.5

(1) EEA firms should note that the chapter only addresses the procedures which the FSA will follow under the Act after it has received a consent notice or been notified of an EEA firm's intentions by its Home State regulator. So, an EEA firm should consider this guidance in conjunction with the requirements with which it will have to comply in its Home State.

(2) The guidance in this chapter represents the FSA's interpretation of the Single Market Directives the Act and the secondary legislation made under the Act. The guidance is not exhaustive and should not be seen as a substitute for a person consulting the legislation or taking legal advice.

21/02/2002

AUTH 5.2

EEA firms and Treaty firms

01/12/2004

AUTH 5.2.1

A person will only be an EEA firm or a Treaty firm if it has its head office in an EEA State other than the United Kingdom. EEA firms and Treaty firms are entitled to exercise both the right of establishment and the freedom to provide services under the Treaty. The difference, however, is that an EEA firm has a right to passport under a Single Market Directive, whereas a Treaty firm carries on activities which do not fall within the scope of a Single Market Directive. An EEA firm may also be a Treaty firm if it carries on such activities. A person may be a Treaty firm, where, for example, it carries on business that:

(1) comprises regulated activities, such as reinsurance, which are not covered by any Single Market Directives; or

(2) includes regulated activities which do not fall within the scope of the Single Market Directive under which it is entitled to exercise an EEA right.

01/12/2001

AUTH 5.2.2

An EEA firm may passport those activities which fall within the scope of the relevant Single Market Directive as long as they are included in its Home State authorisation.

01/12/2001

AUTH 5.3

Qualification for authorisation under the Act

01/12/2004

EEA firms

AUTH 5.3.1

Section 31 of the Act (Authorised persons) states that an EEA firm is authorised for the purposes of the Act if it qualifies for authorisation under Schedule 3 to the Act (EEA Passport Rights). Under paragraph 12 of Part II of that Schedule, an EEA firm qualifies for authorisation if:

(1) it is seeking to establish a branch in the United Kingdom in exercise of an EEA right and satisfies the establishment conditions (see AUTH 5.4.2 G); or

(2) it is seeking to provide cross border services into the United Kingdom in exercise of an EEA right and satisfies the service conditions (see AUTH 5.5.3 G).

01/12/2001

AUTH 5.3.2

(1) On qualifying for authorisation, subject to AUTH 5.3.2 G (1A), an EEA firm will have permission to carry on each permitted activity (see (2) below) which is a regulated activity:

(a) through its UK branch (if it satisfies the establishment conditions); or
(b) by providing cross border services into the United Kingdom (if it satisfies the service conditions).

(1A)

(a) Paragraph (1) does not apply to the activity of dealing in units in a collective investment scheme in the United Kingdom where:

(i) the firm is an EEA UCITS management company;
(ii) the firm satisfies the establishment conditions in AUTH 5.4.2 G; and
(iii) the FSA notifies the EEA firm and the EEA firm's Home State regulator that the way in which it intends to market a relevant scheme in the United Kingdom does not comply with the law in force in the United Kingdom.

(b) The FSA's notice under (1A)(a)(iii) has to be given to the EEA firm within two months of receiving the consent notice (AUTH 5.4.2 G(1)) and will be similar to a warning notice.
(c) For details of the FSA's procedures for the giving of warning notices and references to the Tribunal, see DEC 2.2 (Statutory notice procedure: Warning notice and decision notice procedure) and DEC 5 (References to the Tribunal, publication and services of notices).

(2) The permitted activities of EEA firm are those activities identified in the consent notice, regulator's notice or notice of intention. Permitted activities may include activities that are within the scope of a Single Market Directive but which are unregulated activity in the United Kingdom.
(3) Paragraph 15(2) of Part II of Schedule 3 to the Act states that this permission is treated as being on terms equivalent to those appearing in the consent notice, regulator's notice or notice of intention. For example, it will reflect any limitations or requirements which are included in the firm's Home State authorisation.

13/02/2004

AUTH 5.3.3

An EEA firm which has qualified for authorisation is referred to in the Handbook as an incoming EEA firm.

01/12/2001

Treaty firms

AUTH 5.3.4

Under section 31 of the Act, a Treaty firm is authorised for the purposes of the Act if it qualifies for authorisation under Schedule 4 (Treaty Rights), that is:

(1) the Treaty firmis seeking to carry on a regulated activity; and

(2) the conditions set out in paragraph 3(1) of Schedule 4 to the Act are satisfied.

01/12/2001

AUTH 5.3.5

The conditions in paragraph 3(1) of Schedule 4 to the Act are that:

(1) the Treaty firm has received authorisation under the law of its Home State to carry on the regulated activities it seeks to carry on (under paragraph 3(2)). A Treaty firm is not to be regarded as so authorised unless its Home State regulator has so informed the FSA in writing); and

(2) the relevant provisions of the law of the firm's Home State:

(a) afford equivalent protection (see AUTH 5.3.6 G); or

(b) satisfy the conditions laid down by a Community instrument for the co-ordination or approximation of laws, regulations, or administrative provisions of EEA States relating to the carrying on of that activity; and

(3) the Treaty firm has no EEA right to passport in relation to that activity under one of the Single Market Directives in respect of that activity.

01/12/2001

AUTH 5.3.6

Paragraph 3(3) of Schedule 4 to the Act states that Home State provisions afford equivalent protection if, in relation to the Treaty firm carrying on of the regulated activity, they afford consumers protection which is at least equivalent to that afforded by or under the Act in relation to that activity. A certificate issued by the Treasury that the provisions of the law of a particular EEA State afford equivalent protection in relation to the activities specified in the certificate is conclusive evidence of that fact.

01/12/2001

AUTH 5.3.7

On qualifying for authorisation a Treaty firm will have permission to carry on each permitted activity which is a regulated activity. This permission will be treated on the same terms as those which apply to the Treaty firm's Home State authorisation. For example, it will reflect any limitations or requirements which are included in the firm's Home State authorisation.

01/12/2001

AUTH 5.3.8

The effect of paragraph 5(1) and 5(2) of Schedule 4 to the Act is that a Treaty firm which qualifies for authorisation under that Schedule must, at least seven days before it carries on any of the regulated activities covered by its permission, give the FSA written notice of its intention to do so. Failure to do so is a criminal offence under paragraph 6(1) of that Schedule.

01/12/2001

AUTH 5.3.9

(1) A notice from a Treaty firm under paragraph 5 (2) of the Schedule 4 to the Act must be given in writing in the manner directed, and with the information required, in the information pack provided by the FSA.

(2) The notice must be:

(a) given to a member of, or addressed for the attention of, the Enquiries and Application Department (Applications team); and

(b) delivered to the FSA by one of the methods in (3).

(3) The notice may be delivered by:

(a) post to the address in AUTH 5.3.11 G below; or

(b) leaving the application at the address in AUTH 5.3.11 G below and obtaining a time-stamped receipt; or

01/07/2003

AUTH 5.3.10

(1) The information pack required by AUTH 5.3.9 D should be accompanied by confirmation of the Treaty firm's authorisation from the Home State regulator, as referred to in AUTH 5.3.5 G (1).

(2) An information pack may be obtained from the Authorisation and Approvals Department (Authorisation teams).

01/07/2003

AUTH 5.3.11

(1) To contact the Authorisation and Approvals Department (Authorisation teams):

(a) telephone on +4420 7066 3954 or fax on +4420 7066 xxxx; or

(b) write to: Authorisation and Approvals Department (Authorisation teams), The Financial Services Authority, 25 The North Colonnade, Canary Wharf, London, E14 5HS; or

01/07/2003

AUTH 5.3.12

(1) The guidance in AUTH 2 (Authorisation and regulated activities) is relevant to Treaty firms to help them determine if they require authorisation under the Act.

(2) A Treaty firm which qualifies for authorisation is referred to in the Handbook as an incoming Treaty firm. It has, for each regulated activity for which the conditions in AUTH 5.3.5 G are satisfied, permission, under paragraph 4 of Schedule 4 to theAct, to carry it on through its UK branch or by providing cross border services into the United Kingdom.

01/12/2001

AUTH 5.3.13

(1) An EEA firm that is carrying on both direct insurance and reinsurance business will be entitled to passport under Schedule 3 to the Act in relation to the direct insurance business. It will also have a Treaty right under Schedule 4 to the Act. Such EEA firms are advised to discuss their particular circumstances with the Enquiries and Applications Department (Applications team) before sending in their notification under AUTH 5.5.3 G.

(2) An insurance company with its head office in an EEA State other than the United Kingdom that is carrying on pure reinsurance business in that State, and which wishes to carry on such business in the United Kingdom, is advised to discuss its particular requirements with the Enquiries and Applications Department (Applications team). It may be entitled to exercise a Treaty right provided it satisfies the conditions in paragraph 3(1) of Schedule 4 to the Act (see AUTH 5.3.5 G). Otherwise, it will have to seek a Part IV permission (see AUTH 3 (Applications for Part IV Permission)).

01/07/2003

UCITS qualifiers

AUTH 5.3.14

Under Schedule 5 to the Act (Persons concerned in collective investment schemes), a person who for the time being is an operator, trustee or depository of a scheme which is a recognised scheme under section 264 of the Act is an authorised person. Such a person is referred to in the Handbook as a UCITS qualifier.

01/12/2001

AUTH 5.3.15

A UCITS qualifier has permission under paragraph 2 of Schedule 5 to the Act, to carry on, as far as is appropriate to the capacity in which it acts in relation to the scheme:

(1) the establishing, operating or winding up of a collective investment scheme, and

(2) any activity in connection with, or for the purposes of, the scheme.

01/07/2003

AUTH 5.3.16

A UCITS qualifier should refer to COLLG or to the following sections of COLL and CIS for requirements for recognised schemes:

(1) COLLG 9.2.1G and CIS 16.1.8 G for guidance on notifications;

(2) COLLG 9.2.1G and CIS 17.2 for guidance on information and documentation requirements; and

(3) COLL 9.4 and CIS 17.4 which includes guidance on what facilities need to be maintained.

01/04/2004

AUTH 5.4

EEA firms establishing a branch in the United Kingdom

01/12/2004

What constitutes a branch?

AUTH 5.4.1

There is guidance for UK firms in SUP 13 Annex X [to be added later] on what constitutes a branch. EEA firms may find this of interest although they should follow the guidance of their Home State regulators.

01/12/2001

The conditions for establishing a branch

AUTH 5.4.2

Before an EEA firm exercises an EEA right to establish a branch in the United Kingdom other than under the Insurance Mediation Directive, the Act requires it to satisfy the establishment conditions, as set out in paragraph 13(1), Part II of Schedule 3 to the Act (EEA Rights). These conditions are that:

(1) the FSA has received notice (a consent notice) from the EEA firm's Home State regulator that it has given the EEA firm consent to establish a branch in the United Kingdom;

(2) the consent notice:

(a) is given in accordance with the relevant Single Market Directive;

(b) identifies the activities to which the consent relates; and

(c) includes the information prescribed under regulation 2 of the EEA Passport Rights Regulations (see AUTH 5 Annex 1 G);

(3) the EEA firm has been informed of the applicable provisions or two months have elapsed beginning with the date on which the FSA received the consent notice.

01/12/2001

AUTH 5.4.3

For the purposes of paragraph 13 of Part II of Schedule 3 to the Act, the applicable provisions may include FSA rules. The EEA firm is required to comply with relevant rules when carrying on a passported activity through a branch in the United Kingdom as well as with relevant UK legislation.

01/12/2001

The notification procedure

AUTH 5.4.4

(1) When the FSA receives a consent notice from the EEA firm's Home State regulator, it will, under paragraphs 13(2)(b), (c) and 13(3) of Part II of Schedule 3 to the Act, notify the applicable provisions (if any) to:

(a) the EEA firm; and

(b) in the case of an EEA firm passporting under Insurance Directives, the Home State regulator;

within two months of the date on which the FSA received the consent notice.

(2) Although the FSA is not required to notify the applicable provisions to an EEA firm passporting under the Insurance Mediation Directive, these provisions are set out in AUTH 5 Annex 3 G (Application of the Handbook to Incoming EEA Firms).

01/12/2001

AUTH 5.5

EEA firms providing cross border services into the United Kingdom

01/12/2004

Is the service provided within the United Kingdom?

AUTH 5.5.1

There is guidance for UK firms in SUP 13 Annex X on when a service is provided cross border [to be added later]. EEA firms may find this of interest although they should follow the guidance of their Home State regulators.

01/12/2001

AUTH 5.5.2

An EEA firm should note that the requirement under the Single Market Directives to give a notice of intention to provide cross border services applies whether or not:

(1) it has established a branch in the United Kingdom; or

(2) those cross border services are regulated activities.

01/12/2001

The conditions for providing cross border services into the United Kingdom

AUTH 5.5.3

Before an EEA firm exercises an EEA right to provide cross border services into the United Kingdom, the Act requires it to satisfy the service conditions, as set out in paragraph 14 of Part II of Schedule 3 to the Act. These conditions are that:

(1) the EEA firm has given its Home State regulator notice of its intention to provide cross border services into the United Kingdom (a notice of intention);

(2) if the EEA firm is passporting under the Investment Services Directive, the Insurance Directives, or the Insurance Mediation Directive, the FSA has received notice ("a regulator's notice") from the EEA firm's Home State regulator containing the information prescribed under regulation 3 of the EEA Passport Rights Regulations (see AUTH 5 Annex 2 G);

(3) if the EEA firm is passporting under the Insurance Directives or the Insurance Mediation Directive, its Home State regulator has informed the EEA firm that it has sent the regulator's notice to the FSA; and

(4) if the EEA firm is passporting under the Insurance Mediation Directive, one month has elapsed beginning with the date when the EEA firm's Home State regulator informed the EEA firm that it had sent the regulator's notice to the FSA.

01/12/2001

The notification procedure

AUTH 5.5.4

(1) Unless the EEA firm is passporting under the Insurance Mediation Directive, if the FSA receives a regulator's notice or, where no notice is required (in the case of an EEA firm passporting under the Banking Consolidation Directive), is informed of the EEA firm's intention to provide cross border services into the United Kingdom, the FSA will, under paragraphs 14(2)(b) and 14(3) of Part II of Schedule 3 to the Act, notify the EEA firm of the applicable provisions (if any) within two months of the day on which the FSA received the regulator's notice or was informed of the EEA firm's intention.

01/12/2001

AUTH 5.5.5

An EEA firm that has satisfied the service conditions in AUTH 5.5.3 G is entitled to start providing cross border services into the United Kingdom. However, a EEA firm that wishes to start providing cross border services but has not yet received notification of the applicable provisions may wish to contact the FSA's Passport Notification Unit (see AUTH 5.8.1 G (2)).

01/12/2001

AUTH 5.6

Which rules will an incoming EEA firm be subject to?

01/12/2004

AUTH 5.6.1

AUTH 5 Annex 3 G summarises how the Handbook applies to incoming EEA firms.

01/12/2001

AUTH 5.6.2

An incoming EEA firm or incoming Treaty firm carrying on business in the United Kingdom must comply with the applicable provisions (see AUTH 5.5.4 G) and other relevant UK legislation. For example where the business includes:

(1) business covered by the Consumer Credit Act 1974, then an incoming EEA firm or incoming Treaty firm must comply with the provisions of that Act, as modified by paragraph 15(3) of Schedule 3 to the Act; or

(2) effecting or carrying out contracts covering motor vehicle third party liability risks as part of direct insurance business, then an incoming EEA firm or incoming Treaty firm is required to become a member of the Motor Insurers' Bureau.

01/12/2001

AUTH 5.6.3

In particular, an EEA firm or Treaty firm must comply with the applicable provisions in SUP 10 (Approved persons). An EEA firm or Treaty firm should read AUTH 6 (Approved persons) but also refer to SUP 10.1 (Application) which sets out the territorial provisions of the approved persons regime.

01/12/2001

AUTH 5.6.4

Under the EEA Passport Rights Regulations, references in section 60 of the Act (applications for approval for persons to perform controlled functions) to "the authorised person concerned" include an EEA firm with respect to which the FSA has received a consent notice or regulator's notice under paragraph 13 of Schedule 3 to the Act (see AUTH 5.4.2 G (1) and AUTH 5.4.2A G (2)) or a regulator's notice under paragraph 14 of that Schedule (see AUTH 5.5.3 G (2)), and which will be the authorised person concerned if the EEA firm qualifies for authorisation under that Schedule.

01/12/2001

AUTH 5.6.5

AUTH 5 Annex 3 G does not apply to incoming ECA providers. Such persons should refer to ECO for information on how the Handbook applies to them.

01/12/2001

AUTH 5.7

Top-up permission

01/12/2004

AUTH 5.7.1

If a person established in the EEA:

(1) does not have an EEA right;

(2) does not have permission as a UCITS qualifier; and

(3) does not have, or does not wish to exercise, a Treaty right (see AUTH 5.3.4 G to AUTH 5.3.9 D);

to carry on a particular regulated activity in the United Kingdom, it must seek Part IV permission from the FSA to do so (see AUTH 3). This might arise if the activity itself is outside the scope of the Single Market Directives, or where the activity is included in the scope of a Single Market Directive but is not covered by the EEA firm's Home State authorisation. If a person also qualifies for authorisation under Schedules 3, 4 or 5 of the Act as a result of its other activities, the Part IV permission is referred to in the Handbook as a top-up permission.

01/12/2001

AUTH 5.7.2

Where the FSA grants a top-up permission to an incoming EEA firm to carry on regulated activities for which it has neither an EEA right nor a Treaty right, the FSA is responsible for the prudential supervision of the incoming EEA firm, to the extent that the responsibility is not reserved to the incoming EEA firm's Home State regulator.

01/12/2001

AUTH 5.7.3

Top-up permission will normally be required, for example, for:

(1) the marketing of life insurance contracts by intermediaries; and

(2) designated investment business activities carried on in relation to commodity derivatives.

01/12/2001

AUTH 5.7.4

For guidance on how to apply for Part IV permission under the Act, see AUTH 3 (Applications for Part IV permission). If an EEA firm or Treaty firm wishes to make any subsequent changes to its top-up permission, it can make an application for variation of that permission (see SUP 6 (Applications to vary and cancel Part IV permission)).

01/12/2001

AUTH 5.8

Sources of further information

01/12/2004

AUTH 5.8.1

For further information on UK regulation, an EEA firm, aTreaty firm or a UCITS qualifier should contact the Authorisation and Approvals Department (Authorisation Enquiries) at the FSA. Questions about the passporting notification procedures can be addressed to the Passport Notification Unit.

(1) To contact the Authorisation Enquiries team:

(a) telephone on +44 20 7066 0082 or fax on +44 20 7066 9719;
(b) write to: Authorisation and Approvals Department (Authorisation Enquiries), The Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS.

(2) To contact the Passport Notification Unit:

(a) telephone on +44 20 7066 1000 or fax on +44 20 7066 xxxx;
(b) write to: Passport Notification Unit, The Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS;
(c) email: passport.notifications@ fsa.gov.uk.

01/12/2001

AUTH 5 Annex 1

Establishment of a branch: Contents of Consent Notice G

01/12/2004

Type of firm

Para No.

Contents of consent notice (Regulation 2)

Investment firm

(2)(a)

a statement that the firm is an investment firm;

(b)

the requisite details of the branch (see SUP 13 Annex 1 );

(c)

details of any compensation scheme which is intended to protect the branch's investors.

EEA UCITS management company

(2A)(a)

a statement that the firm is an EEA UCITS management company;

(b)

the requisite details of the branch; and

(c)

details of any compensation scheme which is intended to protect the branch's investors.

Credit institution
or

(3)(a)

a statement that the firm is a credit institution;

(b)

the requisite details of the branch (see SUP 13 Annex 1 );

(c)

the amount of the firm's own funds (as defined in Section 1 of Chapter 2 of Title V to the Banking Consolidation Directive); and

(d)

the solvency ratio of the firm (calculated in accordance with the Banking Consolidation Directive).

Financial institution

(4)(a)

a statement that:

(i)

the firm is a financial institution;

(ii)

the firm is a subsidiary undertaking of a credit institution which is authorised in the EEA State in question and which holds at least 90 per cent of the voting rights in the firm (and for the purpose of this paragraph any two or more credit institutions which are authorised in that EEA State and hold voting rights in the firm are to be treated as a single credit institution, and as being "parent undertakings" of the firm);

(iii)

the firm carries on in that EEA State the EEA activities in question;

(iv)

the memorandum and articles of association, or other constituent instrument, of the firm permit it to carry on those activities;

(v)

the consolidated supervision of the firm's parent undertaking or, if more than one of them, any one of them effectively includes supervision of the firm;

(vi)

the firm's parent undertaking has guaranteed or, if more than one, they have jointly and severally guaranteed, the firm's obligations, with the consent of the Home State regulator;

(vii)

the firm's business is being conducted in a prudent manner.

(b)

the requisite details of the branch (see SUP 13 Annex 1 );

(c)

the amount of the firm's own funds (as defined in Section 1 of Chapter 2 of Title V to the Banking Consolidation Directive);

(d)

the solvency ratio of the firm's parent undertaking (calculated in accordance with the Banking Consolidation Directive).

Insurance undertaking

(5)(a)

a scheme of operations prepared in accordance with such requirements as may be imposed by the firm's Home State regulator, setting out (among other things) the types of business to be carried on and the structural organisation of the branch;

(b)

the name of the firm's authorised agent;

(c)

the address in the United Kingdom from which information about the business may be obtained, and a statement that this is the address for service on the firm's authorised agent;

(d)

in the case of a firm which intends to cover relevant motor vehicle risks, a declaration by the firm that it has become a member of the Motor Insurers' Bureau (being a company limited by guarantee and incorporated under the Companies Act 1929(1) on 14 ^th June 1946); and

(e)

a statement by the firm's Home State regulator attesting that the firm has the minimum margin of solvency calculated in accordance with such of the following as are appropriate:

(i)

articles 16 and 17 of the First Non-Life Insurance Directive; and;

(ii)

articles 18, 19 and 20 of the First Life Insurance Directive.

13/02/2004

AUTH 5 Annex 2

Provision of services: Contents of regulator's notice G

01/12/2004

Type of firm

Para No.

Contents of regulator's notice (Regulation 3)

Investment firm

(2)(a)

a statement that the firm is an investment firm; and

(b)

particulars of the programme of operations to be carried on in the United Kingdom including a description of the particular activities which the firm is seeking to carry on in the United Kingdom in the exercise of an EEA right.

EEA UCITS management company

(2A)(a)

a statement that the firm is an EEA UCITS management company;

(b)

(c)

details of any compensation scheme which is intended to protect the branch's investors.

Insurance undertaking

(3)(a)

a statement of the classes of business which the firm is authorised to carry on in accordance with Article 6 of the First Non-Life Directive or Article 6 of the First Life Directive;

(b)

the name and address of the firm;

(c)

the nature of the risks or commitments which the firm proposes to cover in the United Kingdom;

(d)

in the case of a firm which intends to cover relevant motor vehicle risks:

(i)

the name and address of the claims representative (Note); and

(ii)

a declaration by the firm that it has become a member of the Motor Insurers' Bureau (being a company limited by guarantee and incorporated under the Companies Act 1929 (1) on 14 ^th June 1946); and

(e)

a statement by the firm's Home State regulator attesting that the firm has a minimum margin of solvency calculated in accordance with such of the following as are appropriate:

(i)

articles 16 and 17 of the First Non-Life Insurance Directive ; and

(ii)

article 18, 19 and 20 of the First Life Insurance Directive

Insurance intermediary

(4)

that the firm intends to carry on insurance mediation or reinsurance mediation by providing services in the United Kingdom.

13/02/2004

AUTH 5 Annex 3

Application of the Handbook to Incoming EEA Firms G

01/12/2004

The table below summarises the application of the Handbook to an incoming EEA firm. Where the table indicates that a particular module of the Handbook may apply, its application in relation to any particular activity is dependent on the detailed application provisions in that module. The table does not apply to incoming ECA providers. These should refer to ECO 1 for guidance on how the Handbook applies to them.

In some cases, the application of the Handbook depends on whether responsibility for a matter is reserved under a European Community instrument to the incoming EEA firm's Home State regulator. Guidance on the reservation of responsibility is contained in SYSC App 1 (Matters reserved to a Home State regulator).

For an incoming EEA firm which has permission for cross-border services only, many parts of the Handbook apply only if the firm carries on regulated activities in the United Kingdom. Those parts of the Handbook will therefore not apply if the firm confines its activities to those within the overseas persons exclusions in article 72 of the Regulated Activities Order, or which would not be regarded as carried on in the United Kingdom. Further guidance may be found in AUTH 2.4 (Link between activities and the United Kingdom) and AUTH 2.9.15 G to AUTH 2.9.17 G (Overseas persons).

(1) Module of Handbook

(2) Potential application to an incoming EEA firm with respect to activities carried on from an establishment of the firm (or its appointed representative) in the United Kingdom

(3) Potential application to an incoming EEA firm with respect to activities carried on other than from an establishment of the firm (or its appointed representative) in the United Kingdom

PRIN

The Principles apply only in so far as responsibility for the matter in question is not reserved by a European Community instrument to the firm's Home State regulator (PRIN 3.1.1 R).
For an incoming EEA firm which is a BCD credit institution without a top-up permission, Principle 4 applies only in relation to the liquidity of a branch established in the United Kingdom (PRIN 3.1.1 R (2)).

The Principles do not apply if the firm has permission only for cross-border services and does not carry on regulated activities in the United Kingdom (PRIN 3.1.1 R (2)).
The Principles have limited application for activities which are not carried on from a UK establishment (see PRIN 3.3.1 R).
Otherwise, see column (2).

SYSC

SYSC 1 contains application provisions only. SYSC 2 and SYSC 3 apply as set out in SYSC 1.1.1 R (1):
(1) SYSC 2.1.1 R and SYSC 2.1.2 G do not apply;
(2) SYSC 2.1.3 R to SYSC 2.2.3 G apply, but only in relation to allocation of the function in SYSC 2.1.3 R (2) and only in so far as responsibility for the matter in question is not reserved by a European Community instrument to the firm's Home State regulator; and
(3) SYSC 3 applies, but only in so far as responsibility for the matter in question is not reserved by a European Community instrument to the firm's Home State regulator.
SYSC 1.1.7 R (Where?) further restricts the territorial application of SYSC 1 to SYSC 3 for an incoming EEA firm. Further guidance is contained in SYSC 2.1.6 G, Question 12.
SYSC 4 applies to the extent that the Public Interest Disclosure Act 1998 applies to the firm.

SYSC 1 to SYSC 3 do not apply if the firm has permission only for cross-border services and does not carry on regulated activities in the United Kingdom (SYSC 1.1.1 R (2)).
SYSC 1 to SYSC 3 have limited application for activities which are not carried on from a UK establishment (see SYSC 1.1.7 R).
Otherwise, see column (2).

COND

COND does not apply if the firm does not have, or apply for, a top-up permission.
Otherwise, only threshold conditions 1, 3, 4 and 5 apply and only in so far as relevant to:
(1) an application for a top-up permission under Part IV of the Act (that is, a permission to carry on regulated activities in addition to those permitted through its authorisation under Schedule 3 to the Act (EEA Passport Rights)); and
(2) the exercise of the FSA's own-initiative power in relation to the top-up permission.
(COND 1.1.1 G.)

As column (2).

APER

APER applies to approved persons (APER 1.1.1 G). See below under SUP 10 as to whether controlled functions are performed, and approval therefore required.

Not relevant because SUP 10 does not apply.

FIT

FIT applies to a firm wishing to establish a branch in the United Kingdom or to apply for a top-up permission in respect of any application that it makes for the approval of a person to perform a controlled function (FIT 1.1). See under SUP 10 below as to whether such approval is required.

Does not apply.

GEN

GEN applies (GEN 1.1, GEN 2.1, GEN 3.1, GEN 4.1, GEN 5.1 and GEN 6.1). However, (a) GEN 4 does not apply to the extent that the firm is subject to equivalent rules imposed by its Home State (4.1.1 R (3)) and (b) GEN 6 only applies to business that can be regulated under section 138 of the Act (General rule-making power). It does not therefore apply if, or to the extent that, responsibility has been reserved to an incoming firm's Home State regulator by a European Community instrument.

GEN 4 does not apply if the firm has permission only for cross-border services and does not carry on regulated activities in the United Kingdom.
Otherwise, as column (2).

IPRU(BANK)

Only the following apply, and only if the firm is a credit institution other than an electronic money institution within the meaning of article 1(3)(a) of the E-Money Directive that has the right to benefit from the mutual recognition arrangements under the Banking Consolidation Directive (IPRU(BANK) 3.2.1R):
(1) IPRU(BANK) 3.3.15R, IPRU(BANK) 3.3.16G and IPRU(BANK) 3.5.1R; and
(2) chapter CO (which provides an overview of the underlying policy) and the more detailed guidance in chapters CB, CA, BC, BO, FX, CM, DU, TI, TE, TC, TL, TU, TS and TV.

Does not apply. But if the firm is a credit institution whose notification to the FSA of its intention to provide services in the United Kingdom covers services provided through a branch, see column (2).

IPRU(BSOC)

Does not apply because an incoming EEA firm cannot be a building society (IPRU(BSOC) X.2.1R).

IPRU(FSOC)

Does not apply because an incoming EEA firm cannot be a friendly society (IPRU(FSOC) 1.1).

IPRU(INS)

Only IPRU(INS) 3.6 and 3.7 (Linked long-term contracts) apply, and only if the firm is an insurer (IPRU(INS) 1.1(b)).

As column (2).

IPRU(INV)

IPRU(INV) does not apply unless the firm:
(1) has a top-up permission;
(2) is an authorised professional firm, investment management firm, members' adviser, personal investment firm, securities and futures firm, service company or underwriting agent; and
(3) is not a lead regulated firm or a media firm.
(IPRU(INV) 1.1.1R and 1.2R)

As column (2).

PRU

PRU 9.1 (Responsibility for insurance mediation activity) does not apply unless the firm has a top-up permission.
PRU 9.2 (Professional indemnity insurance requirements for insurance and mortgage mediation activity and mortgage lending and administration) does not apply unless the firm has a top-up permission.

As column (2).
As column (2).

PRU

PRU 9.3 (Capital resources for insurance and mortgage mediation activity and mortgage lending and administration) does not apply unless the firm has a top-up permission. See PRU 9.3.2 G for more detailed guidance.
PRU 9.4 (Insurance undertakings and mortgage lenders using insurance or mortgage mediation services) does not apply unless the firm has a top-up permission.
Otherwise, PRU does not apply unless the firm is an insurer to which PRU 7.6.33 R applies

As column (2).
As column (2).

COB

COB applies.

Where the activity:
(1) (a) would fall within the overseas persons exclusions in article 72 of the Regulated Activities Order; or
(b) would not be regarded as carried on in the United Kingdom; or
(c) is not carried on with or for a client in the United Kingdom;
then only the following apply:
(d) COB 3 (Financial promotion), but see the territorial scope in COB 3.3 (Where?);
(e) COB 5.5.7 R (Overseas business);and
(f) certain parts of COB 6 (Product disclosure and the customer's right to cancel or withdraw) but only in relation to long-term insurance business carried on with a customer habitually resident in the United Kingdom or if the State of the risk is the FSA (see COB 1.4.7 R and COB 1.4.8 R); and
(g) (i) COB 4.3.19 R to COB 4.3.25 R save that the firm must also comply with those rules as if they also applied to a firm carrying out the activities in COB 4.3.19R (1) with or on behalf of all private customers;
(ii) COB 5.2.12 R to COB 5.2.14 R; and
(iii) COB 5.3.18 R (1) and COB 5.3.18A R to COB 5.3.18C R;
but only in relation to activities passported under the IMD (see COB 1.4.12R (3));
(2) concerns a distance contract and is carried on with retail customers in the United Kingdom from an establishment maintained by the firm in an EEA State which:
(a) has implemented the DMD; or
(b) has obligations in its domestic law corresponding to those provided for by the DMD;
COB 4.2, COB 5, and COB 6 do not apply.
Otherwise, as column (2), (COB 1.4.3 R).

ICOB

ICOB applies.

Only the following provisions of ICOB apply:
(a) ICOB 3 (Financial promotion), but see the territorial scope in ICOB 3.4 (Application: where?)
(b) ICOB 5.5.20 R, but only in relation to general insurance contracts if the state of the risk is the United Kingdom;
(c) ICOB 5.5.20 Rand ICOB 5.5.20 R, but only in respect of non-investment insurance contracts which are pure protection contracts where the habitual residence of the customer, other than an EEA ECA recipient, is in the United Kingdom;
(d) ICOB 6 (Cancellation), but only in respect of non-investment insurance contracts which are pure protection contracts where the habitual residence of the customer, other than an EEA ECA recipient, is in the United Kingdom.

CASS

CASS does not apply with respect to the firm's passported activities unless the firm is an insurer (CASS 1.2.3 R (2)).

As column (2).

MAR

MAR 1 (Code of market conduct)
Applies if the firm is seeking guidance as to whether or not behaviour amounts to market abuse (MAR 1.1.1 G).

MAR 1 (Code of market conduct) As column (2).

MAR 2 (Price stabilising rules)
Applies if the firm undertakes stabilising action and wishes to show that it has acted in conformity with price stabilising rules, or that its behaviour conforms with rules in accordance with section 118(8)of the Act (Market abuse) (MAR 2.1 Application))

MAR 2 (Price stabilising rules)
Only applies in so far as the firm undertakes stabilising action and wishes to rely on a defence that it has acted in conformity with price stabilising rules, or that its behaviour conforms with rules in accordance with section 118(8)of the Act (Market abuse) (MAR 2.1.6 R (1)

MAR 3 (Inter-professional conduct)
Applies (MAR 3.1.4 R).

MAR 3 (Inter-professional conduct)
Does not apply (MAR 3.1.4 R).

MAR 4 (Endorsement of the Take-over Code)
Applies to firms whose permission includes, or ought to include, any designated investment business, except as set out in MAR 4.4.1 R.

MAR 4 (Endorsement of the Take-over Code)
Does not apply (MAR 4.4.1 R (4)(b)).

MAR 5 (Alternative Trading Systems)
Does not apply (MAR 5.1.1 R).

TC applies, but only in so far as responsibility for any matter it covers is not reserved by a European Community instrument to the firm's Home State regulator.

TC 1 (Commitments):
(1) contains guidance relevant to compliance with Principle 3, satisfaction of threshold condition 5 and the fit and proper test for approved persons; it is therefore relevant only if they apply to the firm (see the guidance on application of PRIN, COND and FIT above);
(2) in particular, does not therefore apply if the firm has permission only for cross-border services and does not carry on regulated activities in the United Kingdom.
TC 2 (Rules and guidance) does not apply (TC 2.1.2 R (2)).

Applies (ML 1.1.2 R).

Does not apply (ML 1.1.2 R).

AUTH

AUTH applies to the firm if it:
(1) is considering carrying on activities in the United Kingdom which may fall within the scope of the Act and is seeking guidance on whether it needs a top-up permission; or
(2) is, or is considering, applying to the FSA to carry on regulated activities in the United Kingdom under a top-up permission; or
(3) is, or is considering, establishing a branch or providing cross-border services into the United Kingdom using EEA rights.

As column (2).

SUP

SUP 1 (The FSA's approach to supervision)
Applies, but contains only guidance.

SUP 1 (The FSA's approach to supervision)
As column (2).

SUP 2 (Information gathering by the FSA on its own initiative)
The application of this chapter is the same as for Principle 11 (see under PRIN above).

SUP 2 (Information gathering by the FSA on its own initiative)
As column (2).

SUP 3 (Auditors)
Applies to the firm (and its auditor) only if the firm has a top-up permission.

SUP 3 (Auditors)
As column (2).

SUP 4 (Actuaries)
Does not apply.

SUP 4 (Actuaries)
Does not apply

SUP 5 (Skilled persons)
Applies only if the firm is required by the FSA to provide a report under section 166 of the Act (Reports by skilled persons).

SUP 5 (Skilled persons)
As column (2).

SUP 6 (Applications to vary and cancel Part IV permission)
Applies only if the firm has a top-up permission.

SUP 6 (Applications to vary and cancel Part IV permission)
As column (2).

SUP 7 (Individual requirements)
Applies only if the firm has a top-up permission. It contains only guidance on the exercise of the FSA's own-initiative power to vary that permission. The FSA has similar, but more limited, powers of intervention under Part XIII of the Act in relation to the permission of the firm under Schedule 3 to the Act (see ENF 4).

SUP 7 (Individual requirements)
As column (2).

SUP 8 (Waiver and modification of rules)
Applies only if the firm wishes to apply for, or consent to, or has been given, a waiver of the FSA's rules (SUP 8.1.1 R).

SUP 8 (Waiver and modification of rules)
As column (2).

SUP 9 (Individual guidance)
Applies only if the firm wishes to obtain individual guidance from the FSA or if the FSA gives the firm individual guidance on its own initiative (SUP 9.1.1 G).

SUP 9 (Individual guidance)
As column (2).

SUP 10 (Approved persons)
Applies, but the applicable controlled functions are limited. See SUP 10.1 (Application) for more detailed guidance.

SUP 10 (Approved persons)
Does not apply (SUP 10.1.6 R).

SUP 11 (Controllers and close links)
Does not apply (SUP 11.1.1 R (2)).

SUP 12 (Appointed representatives)
Applies only if the firm has permission to carry on designated investment business, insurance mediation activity or mortgage mediation activity and wishes to appoint, or has appointed, an appointed representative (SUP 12.1.1 R (1)).

SUP 12 (Appointed representatives)
As column (2).

SUP 13 (Exercise of passport rights by UK firms)
Does not apply.

SUP 14 (Incoming EEA Firms: Changing detail and cancelling qualifications for authorisation)
Applies.

SUP 14 (Incoming EEA Firms: Changing detail and cancelling qualifications for authorisation)
Applies

SUP 15 (Notifications to the FSA)
Applies in full if the firm has a top-up permission. Otherwise, the application is modified as set out in SUP 15 Annex 1.

SUP 15 (Notifications to the FSA)
Does not apply if the firm has permission only for cross-border services and does not carry on regulated activities in the United Kingdom (SUP 15 Annex 1).Otherwise, as column (2).

SUP 16 (Reporting requirements)
Parts of this chapter may apply if the firm has a top-up permission or if the firm is:
(a) a bank; or
(b) a depositary of an ICVC; or
(c) an OPS firm; or
(d) a trustee of an AUT; or
(e) an insurer with permission to effect or carry out life policies; or
(f) a firm with permission to establish, operate or wind up a stakeholder pension scheme; or
(g) a firm with permission to advise on investments, arrange (bring about) deals in investments, make arrangements with a view to transactions in investments, or arrange safeguarding and administration of assets.
(SUP 16.1.)

SUP 16 (Reporting requirements)
Parts of this chapter may apply if the firm has a top-up permission or if the firm is:
(a) a depositary of an ICVC; or
(b) an OPS firm; or
(c) a trustee of an AUT; or
(d) an insurer with permission to effect or carry out life policies; or
(e) a firm with permission to establish, operate or wind up a stakeholder pension scheme; or
(f) a firm with permission to advise on investments, arrange (bring about) deals in investments, make arrangements with a view to transactions in investments, or arrange safeguarding and administration of assets
(SUP 16.1.)

SUP 17 (Transaction reporting)
Does not apply in relation to the firm's passported activities. Otherwise, this chapter applies only if the firm is a securities and futures firm, a personal investment firm or an ISD investment firm (SUP 17.1.1).

SUP 17 (Transaction reporting)
Does not apply (SUP 17.1.1 (2)(a)).

SUP 18 (Transfers of business) SUP 18.4
Does not apply. SUP 18.1, SUP 18.2 and SUP 18.3 may be relevant if the firm proposes to transfer the whole or part of its business by an insurance business transfer scheme or to accept such a transfer or proposes to accept certain transfers of insurance business taking place outside the United Kingdom.

SUP 18 (Transfers of business)
As column (2).

SUP 19 (Commodity Futures Trading Commission Part 30 Exemption)
This chapter may be relevant if the firm intends to trade on behalf of US customers on non-US futures and options exchanges.

SUP 19 (Commodity Futures Trading Commission Part 30 Exemption)
Does not apply (SUP 19.1.1 G (2)).

SUP 20 (Fees)
Applies (SUP 20.1.1 R) but modified (SUP 20.4.7 G - SUP 20.4.10 R).

SUP 20 (Fees)
As column (2).

SUP App 1 (Prudential categories)
Applies and provides guidance on the prudential categories used in the Handbook.

SUP App 1 (Prudential categories)
As column (2).

SUP App 2 (Insurers: Scheme of operations)
Does not apply (SUP App 2.1.1 R).

ENF

ENF applies and contains guidance on the use of the FSA's enforcement powers (ENF 1).

DEC

DEC applies and contains guidance on the FSA's decision making procedures (DEC 1).

DISP

Applies (DISP 1.1.1 R).

Does not apply (DISP 1.1.1 R).

COMP

Applies, except in relation to the passported activities of an ISD investment firm or a BCD credit institution (see the definition of "participant firm") other than an electronic money institution within the meaning of article 1(3)(a) of the E-Money Directive that has the right to benefit from the mutual recognition arrangements under the Banking Consolidation Directive. However, an ISD investment firm or BCD credit institution may be able to apply for top-up cover in relation to its passported activities (see COMP 14 (Participation by EEA Firms)).

Does not apply in relation to the passported activities of an ISD investment firm or a BCD credit institution (see the definition of "participant firm"). Otherwise, COMP may apply, but the coverage of the compensation scheme is limited for non-UK activities (see COMP 5).

COAF

Applies if the firm wishes to bring a complaint under the complaints scheme, provided the complaint meets the requirements of the complaints scheme (COAF 1.2).

As column (2).

COLL and CIS

COLL and CIS apply if the firm:
(a) is the operator or depositary of an AUT or ICVC; or
(b) wishes to apply for an authorisation order to establish an AUT or ICVC; or
(c) is the operator of a recognised scheme; or
(d) wishes to apply for recognition of a recognised scheme.

As column (2).

CRED

Does not apply.

ECO

ECO 2 applies if the firm is an outgoing ECA provider. ECO 3 applies if the firm is a domestic ECA provider. ECO 1 does not apply.

ECO 1 applies if the firm is an incoming ECA provider except for ECO 1.2.1 R which does not apply if:.
(a) the electronic commerce activity is not insurance business which:
(i) satisfies the conditions in ECO 1.2.3 R; and
(ii) is carried on by an insurer; and
(b) the EEA State from which the activity is provided has implemented the DMD with the result that the obligations provided for by the DMD are applied when the incoming ECA provider is carrying on the activity from an establishment in that State with a UK ECA recipient in the United Kingdom.
ECO 2 and ECO 3 do not apply.

ELM

Only ELM 6 and (in so far as it applies to the rules in ELM 6) ELM 5.6.1R apply.

Does not apply.

LLD

Does not apply.

MCOB

Applies where the activity is carried on with or for a customer resident in the United Kingdom or another EEA State at the time that the activity is carried on, but see the territorial scope in MCOB 3.3 (Application: where?).

Applies where the activity is carried on with or for a customer resident in the United Kingdom at the time, that the activity is carried on but see MCOB 1.3.4 R (Distance contracts entered into from an establishment in another EEA State) and MCOB 3.3 (Application: where?).

PROF

PROF applies only if the firm is an authorised professional firm.

As column (2).

REC

Does not apply.

01/04/2004

AUTH 6

Approved
persons

AUTH 6.1

Application and purpose

01/12/2004

Application

AUTH 6.1.1

This chapter applies to:

(1) a person who wishes to become an authorised person under the Act and who is, or is considering, applying to the FSA for Part IV permission to carry on regulated activities in the United Kingdom;

(2) an EEA firm, a Treaty firm or a UCITS qualifier that wishes to establish a branch or provide cross-border services into the United Kingdom using EEA rights, Treaty rights or UCITS Directive rights, or apply for a top-up permission;

(3) a candidate, but only as a matter of general relevance.

21/02/2002

AUTH 6.1.2

An EEA firm, a Treaty firm and UCITS qualifier should refer to SUP 10.1 (Application) for the special application of the approved persons regime to firms which are exercising their passport rights, Treaty rights or rights as a UCITS qualifier.

03/09/2001

AUTH 6.1.3

In this chapter, references to a 'firm' should be read as including an applicant for Part IV permission, or an EEA firm a Treaty firm or a UCITS qualifier, unless the context otherwise requires.

03/09/2001

Purpose

AUTH 6.1.4

This chapter gives guidance on the provisions of the Act and the Handbook under which a firm must obtain the prior approval of certain persons to perform controlled functions on its behalf.

03/09/2001

AUTH 6.2

Introduction

01/12/2004

AUTH 6.2.1

A controlled function is a function specified by the FSA which cannot be performed by a person under an arrangement entered into by a firm, or one of its contractors, until approval for this has been given by the FSA. Approval from the FSA is required for each controlled function to be performed by a person.

03/09/2001

AUTH 6.2.2

An approved person is a person whose performance of one or more controlled functions has been approved by the FSA.

03/09/2001

AUTH 6.2.3

A person who performs a controlled function is likely to be an individual, but in some cases the function may be performed by others, such as a body corporate. References to a person in this chapter, and the rest of the Handbook, should always be read as including these other entities.

03/09/2001

AUTH 6.2.4

This regime covers persons who perform controlled functions in the capacity of an appointed representative or an employee of such an appointed representative. For further details on appointed representatives, see SUP 10.1.16 R and SUP 12 (Appointed Representatives).

03/09/2001

AUTH 6.2.5

An introducer, that is, in outline, a person, other than an appointed representative, who is appointed by a firm to effect introductions between customers and the firm but not to give advice on investments, will not, for this reason alone, need to be an approved person although certain obligations will apply (for example, see COB 5 (Advising and selling).

03/09/2001

AUTH 6.2.6

The controlled functions which have been specified by the FSA are those functions which the FSA sees as key to the operation of the provisions of Part V of the Act (Performance of Regulated Activities) and the provisions made under Part V. Those provisions include:

(1) the Statements of Principle and Code of Practice for Approved Persons issued under section 64 of the Act (Conduct: statements and codes) (see APER); and

(2) the fit and proper test referred to in section 61 of the Act (Determination of applications) (see FIT).

03/09/2001

AUTH 6.2.7

The purpose of the direct approval of persons who perform controlled functions is to complement the regulation of the firm for which the approved person performs the function.

18/10/2001

AUTH 6.2.8

The FSA may grant an application by a firm for a candidate to perform one or more controlled functions only if it is satisfied that he is fit and proper to perform the function to which the application relates (see AUTH 6.3.11 G and AUTH 6.3.13 G).

21/02/2002

Controlled functions

AUTH 6.2.9

The list of controlled functions which the FSA has specified in accordance with section 59 of the Act (Approval for particular arrangements) is set out in SUP 10 (Approved persons) and in Form A, a copy of which is included in the application pack for Part IV permission, and which also may be found in SUP 10 Annex 4.

18/10/2001

AUTH 6.3

Procedures relating to approved persons

01/12/2004

AUTH 6.3.1

An application for the FSA's approval under section 59 of the Act (Approval for particular arrangements) must be made by completing Form A (included as part of the application pack for Part IV permission) in the manner directed by AUTH 3.9.3 D (2) to AUTH 3.9.3 D (5).

21/02/2002

AUTH 6.3.2

In accordance with section 60 of the Act (Application for approval), applications for approved persons must be submitted by, or on behalf of, the firm, not by the candidate.

03/09/2001

AUTH 6.3.3

A summary of FSA procedures is in AUTH 6 Annex 2 G.

03/09/2001

AUTH 6.3.4

Until the application has been determined by the FSA, the firm which submits a Form A must inform the FSA of any significant changes to the information given in the form immediately it becomes aware of the change.

03/09/2001

Outsourcing to another firm

AUTH 6.3.5

Where a firm has outsourced the performance of a controlled function, the details of the outsourcing will determine who may apply for the candidate's approval. Further details are in SUP 10.12.4 G.

03/09/2001

EEA firms and Treaty firms

AUTH 6.3.6

The FSA encourages EEA firms and Treaty firms that wish to carry on regulated activities in the United Kingdom to submit any necessary applications for approved person status as early as possible. This will help to ensure that there are no delays in the EEA firm or Treaty firm complying with applicable provisions and commencing its regulated activities. For further details on the application of the approved persons regime to EEA firms and Treaty firms see SUP 10.1 (Application).

03/09/2001

Processing an application

AUTH 6.3.7

The Act allows the FSA three months from the time it receives a properly completed application for approval under section 59 of the Act (Approval for particular arrangements) to consider it and come to a decision. However, if the applicant for Part IV permission is not yet an authorised person, approved person status will only be effective from the date the applicant for Part IV permission receives permission.

03/09/2001

AUTH 6.3.8

Because approved person status is only effective from the date Part IV Permission is given, it is possible that this may take up to twelve months from the date of application if the application for Part IV permission is incomplete. See AUTH 3.9.30 G (How long will an application take?) for guidance on how long this process may take.

03/09/2001

AUTH 6.3.9

Before making a decision either to approve or to give a warning notice(see AUTH 8.3 (Statutory notices and other matters)), the FSA may request further information about the candidate from the applicant for Part IV permission. If it does this, the three month approval period:

(1) will stop on the day the FSA requests the information; and

(2) will start running again from the point at which it stopped, on the final day on which the FSA receives all the requested information.

18/10/2001

AUTH 6.3.10

The FSA may grant an application only if it is satisfied that the candidate is a fit and proper person to perform the controlled function stated in the application form.

03/09/2001

AUTH 6.3.11

For further guidance on criteria for assessing fitness and propriety, see FIT.

21/02/2002

Decisions on applications

AUTH 6.3.12

See AUTH 8 (Determining applications) for an overview of how applications for Part IV permission and for approval of a candidate under section 59 of the Act (Approval for particular arrangements) will be determined. AUTH 8 also includes a summary of the decision making procedures which apply.

03/09/2001

AUTH 6.3.13

Whenever it approves an application, the FSA will confirm this in writing to all interested parties.

03/09/2001

AUTH 6.4

Further questions

01/12/2004

AUTH 6.4.1

A list of frequently asked questions and answers relating to new firms is at AUTH 6 Annex 1 G.

03/09/2001

AUTH 6.4.2

If the firm has questions unanswered by AUTH 6 Annex 1 G, it should contact the FSA's Authorisation and Approvals Department (Individual approvals team):

(1) telephone 020 7066 0019; or

(2) write to: Authorisation and Approvals Department (Individual approvals team), The Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS; or

(3) e-mail iva@fsa.gov.uk

01/07/2003

AUTH 6.5

Notified persons

01/12/2004

AUTH 6.5.1

There are four positions which require notification to the FSA but not approval by the FSA. These relate to overseas firms (but excluding EEA firms) with branches in the United Kingdom. These are:

(1) the firm's worldwide chief executive where the person holding the position is situated outside the United Kingdom;

(2) the person, if not the worldwide chief executive, within the overseas firm with a purely strategic responsibility for UK operations;

(3) for a bank: the two or more persons who effectively direct its business in accordance with IPRU(BANK) GN 3.3.1 R;

(4) for an insurer: the authorised UK representative.

18/10/2001

AUTH 6.5.2

For further details relating to those positions which require notification only, see SUP 15.4 (Notified persons).

18/10/2001

AUTH 6 Annex 1

Approved Persons

01/12/2004

AUTH 6 Annex 1.1

Question:

Answer:

Requirements of the regime

When is approval required?

The Act requires that approval be obtained before a person performs a controlled function. See section 59 of the Act (Approval for particular arrangements).

Can an individual be approved in advance of a firm becoming authorised?

No. The application will be coordinated to ensure that the approval of the individual coincides with the giving of permission to the firm.

Can a person be approved for more than one controlled function?

Yes. A firm will need to seek approval in respect of each controlled function a person is to perform.

Do the controlled functions apply to an incoming EEA firm that is providing cross border services into the United Kingdom?

No. The approved persons regime does not apply to cross border services. See SUP 10.1.6 R (Application).

May any activity be outsourced by a firm?

Yes. But if that activity constitutes a regulated activity the person to whom it is outsourced will itself need permission.

Can a significant influence function be outsourced?

It is a question of fact in each case who is performing a significant influence function. These functions are mostly described at a high level of responsibility, that is, for example, the director of a company or a partner of a partnership. The persons performing these functions cannot avoid their ultimate responsibility and therefore the need for approval approval. However, some of the significant influence functions may be performed by a person who is specifically brought in to do the job, for example the chief executive function (where it is to be performed by a body corporate) and the appointed actuary function actuarial and with-profits actuary functions.

Do Lloyd's underwriting agents still require registration with Lloyd's?

Yes. Approval for a controlled function is not sufficient.

Submitting an application

Who applies for approval?

It is the firm which applies for approval. See section 60 of the Act (Applications for approval).

What is the role of the candidate in the application process?

Before the firm submits Form A it must verify the information contained in it. As part of this verification, the form provides for the candidate to confirm the accuracy of the information given by the firm so far as it relates to him.

What is the "fit and proper" test for approval?

Section 61(1) of the Act (Determination of applications) provides that the FSA may grant an application only if it is satisfied that the candidate is a fit and proper person to perform the relevant function. In determining this question, the Act sets out the matters to which the FSA may have regard (section 61(2) of the Act) and the FSA has given guidance on this in FIT.

If a firm is unsure whether or not something may have an impact on an individual's fitness and propriety, should it be disclosed?

Yes, always. The non-disclosure of material facts is taken very seriously by the FSA, as it is seen as evidence of current dishonesty. Therefore, if in doubt, disclose.

Must all gaps in previous employment be explained?

Yes.

FSA procedures

Does the FSA verify the information provided to it?

Yes, as far as possible, information is verified.

Will the FSA handle information confidentially?

Yes. The FSA handles all information confidentially and is subject to the provisions of the Data Protection Act 1988.

01/07/2003

AUTH 6 Annex 2

Approved Persons

01/12/2004

AUTH 6 Annex 2.1

03/09/2001

AUTH 7

Periodical publications, news services and broadcasts: applications
for certification

AUTH 7.1

Application and purpose

01/12/2004

Application

AUTH 7.1.1

This chapter applies to anyone involved in publishing periodicals, or in providing news services or broadcasts, who gives (or proposes to give) advice about securities, relevant investments or regulated mortgage contracts and who wishes to determine whether he will be carrying on the regulated activities of advising on investments or advising on regulated mortgage contracts.

15/11/2001

Purpose

AUTH 7.1.2

The purpose of this chapter is to provide guidance on:

(1) when a person involved in publishing periodicals, or in providing news services or broadcasts, requires authorisation to carry on the regulated activities of advising on investments or advising on regulated mortgage contracts (see AUTH 7.3 (Does the activity require authorisation)); and

(2) if he does, whether he qualifies for the exclusion from those activities that applies to a periodical publication, a regularly updated news or information service or a television or radio service (see AUTH 7.4 (Does the article 54 exclusion apply));

(3) if he does, whether his circumstances are an appropriate case for a certificate given by the FSA as conclusive evidence that he does qualify (see AUTH 7.5 When is it appropriate to apply for a certificate));

(4) how to apply for a certificate (see AUTH 7.6.1 G to AUTH 7.6.5 G); and

(5) how the FSA will use its power to give certificates (see AUTH 7.6.6 G to AUTH 7.6.10 G).

15/11/2001

AUTH 7.1.3

This guidance is issued under section 157 of the Act. The guidance represents the FSA's views and does not bind the courts, for example in relation to an action for damages brought by a private person for breach of a rule (see section 150 of the Act (Actions for damages)), or in relation to the enforceability of a contract where there has been a breach of section 19 (The general prohibition) of the Act (see section 26 of the Act (Enforceability of agreements)). Although the guidance does not bind the courts, it may be of persuasive effect for a court considering whether it would be just and equitable to allow a contract to be enforced (see section 28(3) of the Act). Anyone reading this guidance should refer to the Act and to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (the Regulated Activities Order) to find out the precise scope and effect of any particular provision referred to in the guidance and should consider seeking legal advice if doubt remains. If a person acts in accordance with the guidance in the circumstances contemplated by it, then the FSA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates.

15/11/2001

AUTH 7.2

Introduction

01/12/2004

Exclusion for advice given in certain publications and services

AUTH 7.2.1

Advice is excluded by article 54 of the Regulated Activities Order from the regulated activities of advising on investments and advising on regulated mortgage contracts if:

(1) the advice is given in a publication or service that is in one of three formats (see AUTH 7.4.3 G and AUTH 7.4.4 G); and

(2) the principal purpose of the particular format is neither to give certain advice nor to lead to (or enable) certain transactions to be carried out (see AUTH 7.4.5 G and AUTH 7.4.10 G).

15/11/2001

Certificate that the exclusion applies

AUTH 7.2.2

If a person would, but for the exclusion, be carrying on the regulated activities of advising on investments or advising on regulated mortgage contracts, or both, and will be doing so as a business in the United Kingdom (see AUTH 7.3), he may wish to apply to the FSA for a certificate that the exclusion applies (see AUTH 7.6). However, a person does not need a certificate to get the benefit of the exclusion. In many cases it will be clear that the exclusion in article 54 applies and a certificate is not called for. A certificate may be appropriate, however, where the exclusion appears to apply but there may be an element of doubt. The granting of a certificate would remove any such doubt.

15/11/2001

Certificates under the Financial Services Act 1986

AUTH 7.2.3

Certificates given under paragraph 25 of Schedule 1 to the Financial Services Act 1986 (Exclusion for periodical publications giving investment advice) do not have effect after 1 December 2001. Holders of such certificates must consider their position under the terms of the new exclusion. If a person considers that a certificate might be appropriate, a new application must be made.

15/11/2001

AUTH 7.3

Does the activity require authorisation?

01/12/2004

Advising on investments and advising on regulated mortgage contracts

AUTH 7.3.1

Under article 53 of the Regulated Activities Order (Advising on investments), advising a person is a specified kind of activity if :

(1) the advice is given to the person in his capacity as an investor or potential investor, or in his capacity as agent for an investor or a potential investor; and

(2) it is advice on the merits of his doing any of the following (whether as principal or agent) :

(a) buying, selling, subscribing for or underwriting a particular investment which is a security or a relevant investment; or

(b) exercising any right conferred by such an investment to buy, sell, subscribe for or underwrite such an investment.

15/11/2001

AUTH 7.3.1A

Under Article 53A of the Regulated Activities Order (Advising on regulated mortgage contracts), advising a person is a specified kind of activity if:

(1) the advice is given to the person in his capacity as a borrower or potential borrower; and

(2) it is advice on the merits of his doing any of the following:

(a) entering into a particular regulated mortgage contract; or

(b) varying the terms of a regulated mortgage contract entered into by him after mortgage day in such a way as to vary his obligations under that contract.

14/01/2001

AUTH 7.3.2

Articles 53 and 53A of the Regulated Activities Order contain a number of elements, all of which must be present before a person will require authorisation. For guidance on whether a person is carrying on these regulated activities, see AUTH App 1 (Financial promotion and related activities) and AUTH App 4 (Guidance on regulated activities connected with mortgages).

15/11/2001

Carrying on the regulated activity by way of business

AUTH 7.3.3

Under section 22 of the Act (Regulated activities), for an activity to be a regulated activity it must be carried on 'by way of business'. There is power in the Act for the Treasury to change the meaning of the business test by including or excluding certain things. It has exercised this power (see the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (SI No 2001/1177) (the Business Order). This has been amended by Article 18 of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2003 (SI No 2003/1476) as explained in AUTH 7.3.3A G.

15/11/2001

AUTH 7.3.3A

The result of the amendments made to the meaning of the business test in section 22 of the Act is that the test differs depending on the activity in question. Where the regulated activities of advising on investments and advising on regulated mortgage contracts are concerned, the business test is not to be regarded as satisfied unless a person carries on the business of engaging in those activities. This is a narrower test than that of carrying on regulated activities by way of business (as required by section 22 of the Act), as it requires the regulated activities to represent the carrying on of a business in their own right. Where the advice relates to a contract of insurance, the business test is not be regarded as satisfied unless the person carrying on the activity of giving the advice is taking up or pursuing the activity for remuneration. AUTH 2.3 (The Business element) and AUTH 2.4 (Link between activities and the United Kingdom) together with AUTH App 5.4 (The business test) provide further detail on this.

14/01/2001

AUTH 7.3.4

In the FSA's view, for a person to be carrying on the business of advising on investments or advising on regulated mortgage contracts he will usually need to be doing so with a degree of regularity and for commercial purposes - that is to say, he will normally be expecting to gain some kind of a direct or indirect financial benefit. But, in the FSA's view it is not necessarily the case that advice provided free of charge will not amount to a business. Advice is often given 'free' by a journalist or presenter, or in a publication or website, in the sense that no charge is made or commission received. For example, a newspaper may reply to readers' letters to generate goodwill or to generate a supply of further material that it can publish or a website that is 'free' to the user will be sponsored or paid for by advertising. In such cases, if advice on securities, relevant investments or regulated mortgage contracts is given, then in the FSA's view the business of advising on investments or advising on regulated mortgage contracts is being carried on. In addition, non-commercial motives may be relevant in determining whether a person can be said to be carrying on the business of giving advice. For example, an investigative journal or journalist may occasionally feel that it is necessary to warn investors against the purchase of a particular investment because there are suspicions of fraud in connection with that investment. The FSA takes the view that, in such circumstances, the journal or journalist would not be regarded as carrying on the business of advising on investments or advising on regulated mortgage contracts as he would be acting to prevent crime rather than in the carrying on of a business.

15/11/2001

Carrying on the regulated activity in the United Kingdom

AUTH 7.3.5

Advice given in periodicals published from an establishment in the United Kingdom is regarded by the FSA as given in the United Kingdom. A similar approach is taken to advice given in, or by way of, a service provided from such an establishment.

15/11/2001

AUTH 7.3.6

In other circumstances, advice issued remotely may still be given in the United Kingdom. For example, the FSA considers that advice is given in the United Kingdom if :

(1) it is contained in a non-UK periodical that is posted in hard copy to persons in the United Kingdom;

(2) it is contained in a non-UK periodical (or given in or by way of a service) which is made available electronically to such persons.

15/11/2001

AUTH 7.3.7

But even if advice is given in the United Kingdom, the general prohibition will not be contravened if the giving of advice does not amount to the carrying on, in the United Kingdom, of the business of advising on investments or advising on regulated mortgage contracts. Also, the general prohibition will not be contravened if the exclusion for overseas persons in article 72 of the Regulated Activities Order (Overseas persons) applies. That exclusion applies in relation to the giving of advice on securities or relevant investments by an overseas person as a result of a 'legitimate approach' (defined in article 72(7)). In many cases where publications or services are provided from outside the United Kingdom it is likely that they will fall within the terms of this exclusion. For example, this will exclude any advice in a publication or service from being a regulated activity if it is given in response to an approach that has not been solicited in any way. It should be noted, however, that the exclusions in Article 72 only apply to the regulated activity of advising on regulated mortgage contracts where both the lender and the borrower are outside the United Kingdom. The effect of this is that, where the principal purpose of an overseas periodical publication is to offer advice on securities or relevant investments and regulated mortgage contracts, the exclusion for an overseas person who provides advice to persons in the United Kingdom as a result of a legitimate approach will not apply to the advice concerning regulated mortgage contracts.

15/11/2001

Exclusions and exempt persons

AUTH 7.3.8

If a person is carrying on the business of advising on investments in the United Kingdom, he will not require authorisation if:

(1) he is able to rely on an exclusion; in addition to the exclusions already mentioned (in articles 54 and 72 of the Regulated Activities Order), other exclusions that may be relevant are in Chapter XVII of Part II of the Regulated Activities Order; or

(2) he is an exempt person (see AUTH 2.11 (What to do Now?)); since persons are exempt only in relation to specified regulated activities, his exemption must apply to the regulated activity of advising on investments.

15/11/2001

Which person is required to be authorised?

AUTH 7.3.9

Many people may be involved in the production of a periodical publication, news service or broadcast. But if the regulated activity of advising on investments is being carried on so that authorisation is required, the FSA's view is that the person carrying on the activity (and who will require authorisation) is the person whose business it is to have the editorial control over the content. In the case of a periodical publication, this will often be the proprietor. But particular circumstances may vary so that the responsibility for content and editorial control rests with a freelance journalist rather than with the proprietor. In such cases it may well be that the journalist may properly be viewed as carrying on his own business, using the periodical publication as the vehicle for doing so - in which case it is likely to be the journalist alone who needs the authorisation.

15/11/2001

AUTH 7.3.10

Similar principles apply to news services and broadcasts.

15/11/2001

AUTH 7.4

Does the article 54 exclusion apply?

01/12/2004

The formats

AUTH 7.4.1

The exclusion applies to advice given in one of the following formats:

(1) advice in writing or other legible form which is contained in a newspaper, journal, magazine, or other periodical publication;

(2) advice in writing or other legible form which is given by way of a service comprising regularly updated news or information;

(3) advice given in any service consisting of the broadcast or transmission of a television or radio programme.

15/11/2001

AUTH 7.4.2

But the exclusion applies only if the principal purpose of the publication or service is not:

(1) to advise on securities or relevant investments or regulated mortgage contracts: or

(2) to lead or enable persons to:

(a) buy, sell, subscribe for or underwrite securities or relevant investments; or (as the case may be)

(b) to enter as borrower into regulated mortgage contracts, or vary the terms of regulated mortgage contracts entered into by the persons to whom the advice is given as borrower.

15/11/2001

Formats in writing or other legible form

AUTH 7.4.3

(1) There are two specified formats for advice appearing in writing or other legible form.

(2) The first is that of a newspaper, journal, magazine or other periodical publication. For these purposes it does not matter what form the periodical publication takes as long as it can be read. This will include, for example, a newspaper appearing as a hard copy or electronically on a website. It will also include any periodical published on an intranet site.

(3) The second is that of a regularly updated news or information service. As with periodical publications, it does not matter how the service is accessed by, or delivered to, the user as long as it can be read. This will include, for example, a service provided through teletext, a fax retrieval system or a website (including websites that are used through handheld devices). The fact that it must be a 'regularly updated' service means that the provision of up-to-date news or information must be a primary feature of the service (for example, where it is likely to be of commercial value to the recipient). But, in the FSA's view, a news or information 'service' is not restricted to the giving of only news or information since this would not generally constitute the regulated activity of advising on investments (see AUTH App 1 (Advice or information)) or advising on regulated mortgage contracts (see AUTH App 4.6.10 G (Advice or information)). So the exclusion applies to services providing material in addition to news or information, such as comment or advice.

15/11/2001

Television and Radio

AUTH 7.4.4

The third specified format is for advice in any service consisting of the broadcast or transmission of television or radio programmes. This will encompass the transmission through cable of interactive television programmes. In the FSA's view, 'service' in this context goes beyond any particular series of programmes broadcast or transmitted through a given medium. It refers instead to the administrative system (usually aimed at a particular audience) through which a range of different programmes is provided, for example any particular TV or radio channel. In the FSA's view, it is unlikely that a TV or radio service will have one of the principal purposes that would prevent its being able to rely on the exclusion unless the complete service is designed to focus on financial or investment matters.

15/11/2001

The principal purpose test

AUTH 7.4.5

The exclusion applies only if the principal purpose of the publication or service is not:

(1) to give advice on securities, relevant investments or regulated mortgage contracts (see AUTH 7.3.1 G) or;

(2) to lead or enable persons to:

(a) buy, sell, subscribe for or underwrite securities or relevant investments; or

(b) to enter as borrower into regulated mortgage contracts, or vary the terms of regulated mortgage contracts entered into by persons to whom the advice is given as borrower.

References to leading or enabling persons to do the things mentioned in (a) or (b) are abbreviated in AUTH 7.4.9 G and AUTH 7.4.11 G as leading or enabling persons 'to engage in a relevant transaction'.

15/11/2001

AUTH 7.4.6

Any assessment of the principal purpose of a periodical publication, news service or broadcast needs to be carried out against the background that:

(1) they all share the characteristic of being available over a sustained period and, within that period, appearing from time to time with a different content;

(2) the same periodical publication will have many different editions;

(3) the regular updating of the news or information service will produce differences in the material provided, comparing the content of the service as it appears at any one time with its content as it appears at any other; and

(4) the programmes in a TV or radio service are bound to have a different content from each other.

15/11/2001

AUTH 7.4.7

To address this feature of variation in content, article 54 requires that the principal purpose of a publication or service is to be assessed by looking at the publication or service taken as a whole and including any advertisements or other promotional material contained in it. This requirement of an overall assessment of purpose or purposes goes beyond the content of any particular example of the publication or service (such as a particular edition or programme). It fixes instead on the characteristic content of the publication or service looked at over time. This judgment depends on the overall impression of content. One way of approaching this is to consider what an average consumer of a publication or service might expect to find when making a decision whether to buy a particular edition or to use the service.

15/11/2001

AUTH 7.4.8

Looking at the first disqualifying purpose set out in the exclusion, all the matters relevant to whether the regulated activities of advising on investments or advising on regulated mortgage contracts are being carried on must be taken into account (see AUTH App 1 Advising on investments). If the principal purpose of a publication or service is to give to persons, in their capacity as investors (or potential investors) or as borrowers (as the case may be), advice as referred to in AUTH 7.4.5 G (1), then the publication or service will not be able to benefit from this exclusion.

15/11/2001

AUTH 7.4.9

For the second disqualifying purpose, the focus switches to assessing whether the principal purpose of a publication or service is to lead a person to engage in a relevant transaction or enable him to do so. This disqualifying purpose is an alternative to the first. So it extends to material not covered by the first. In this respect :

(1) material in a publication or service that invites or seeks to procure persons to engage in a relevant transaction can be said to "lead" to those transactions even if it would not constitute the regulated activity of advising on investments or advising on regulated mortgage contracts; this includes, for example, material that consists of generic buy or sell recommendations, corporate brochures or invitations to invest in particular products or with a particular broker or fund manager; and

(2) material enables persons to engage in a relevant transaction if it facilitates the transactions, for example by giving a user the forms that enable him to carry out relevant transactions; so this limb of the second disqualifying purpose would apply to the material providing an online dealing facility on an interactive website or to facilities for on-screen dealing through digital television.

In the FSA's view, material will not lead or enable a person to engage in a relevant transaction where the material is intended merely to raise people's awareness of matters relating to securities, relevant investments or regulated mortgage contracts.

15/11/2001

AUTH 7.4.10

The test for determining the principal purpose of any publication that appears on a website, or of any news or information service on a website, is no different from any other medium. An overall view will need to be taken of all the contents of the publication or service, including any features such as chatrooms, advertisements or other promotional material.

15/11/2001

AUTH 7.4.11

In the context of the second disqualifying purpose, whether or not the presence of a hypertext link to another website indicates that the purposes of a publication or service include leading to relevant transactions (or enabling them to be entered into) will depend on all the circumstances. It will, in particular, be necessary to consider the form of the link and the content of the destination website. In the FSA's view, the presence on a host publication or service of a hypertext link which is only the name or logo of another website is unlikely itself to indicate that a purpose of the host website is to lead to relevant transactions (or enable them to be entered into). But if more sophisticated links, such as banners or changeable text, contain promotional material inviting or seeking to procure persons to enter into relevant transactions, those links will have to be weighed in the balance in determining the principal purpose of the publication or service hosting the link. The same applies if the host publication or service hosting the link itself contains material inviting persons to activate the link with a view to entering into relevant transactions.

15/11/2001

AUTH 7.4.12

In reaching a view of the principal purpose of the publication or service as a whole, all the material that falls within either the first or second disqualifying purpose must be considered together.

15/11/2001

Who can benefit from the exclusion?

AUTH 7.4.13

The persons who directly benefit from the exclusion will be the persons who would otherwise require authorisation (see AUTH 7.3.9 G), that is, the person whose business it is to have editorial control over the content of the publication or service. The exclusion will apply regardless of the legal form of the person giving the advice so, for example, it will extend to advice given by a company through its employees.

15/11/2001

AUTH 7.5

When is it appropriate to apply for a certificate?

01/12/2004

AUTH 7.5.1

To decide whether the exclusion in article 54 applies, three assessments need to be made :

(1) first, an assessment whether the vehicle for giving the advice is a newspaper, journal, magazine or other periodical publication, a service comprising regularly updated news or information or a service consisting of the broadcast or transmission of television or radio programmes;

(2) second, an assessment of the purpose or purposes of any particular publication or service; and

(3) third, an assessment of the relative significance of each purpose compared with any others.

15/11/2001

AUTH 7.5.2

Because opinions may differ in circumstances close to the borderline, giving rise to doubt as to whether or not the exclusion applies, the Regulated Activities Order makes provision for a certification process. The purpose of this process is not to provide certification for every publication or service to which the exclusion in article 54 applies.

15/11/2001

AUTH 7.5.3

In many cases it will be clear whether or not a publication or service benefits from the exclusion. A publication or service may provide reports on such a wide range of matters that it is not possible to say that it has any purpose other than to provide coverage of a wide range of matters. Alternatively, it may be clear that the principal purpose of a publication or service is something other than those specified in the article 54 exclusion. Examples of cases where, in the FSA's view, the exclusion is capable of applying include :

(1) national or local newspapers providing the normal range of non-financial news and coverage of other matters (such as sports, arts and leisure) and which simply contain financial journalism (such as reports on particular investments or markets) as one element of their all-round coverage;

(2) weekly or monthly journals aimed at a particular subject (such as computing or sport) but which have some coverage of, or promotional material relating to, investments and financial matters;

(3) websites which provide financial news or information;

(4) closed user group communication systems specialising in financial or investment matters; and

(5) television or radio channels dedicated to consumer affairs which devote a small number of programmes to financial planning.

15/11/2001

AUTH 7.5.4

It is only where there are grounds to think that there is a significant doubt as to the principal purpose of a publication or service that the question of whether or not to apply to the FSA for a certificate under article 54 of the Regulated Activities Order is expected to arise. For example, this may happen where a publication or service has several significant purposes and one of them is a disqualifying purpose referred to in the exclusion in article 54. It may on occasion be difficult to assess the relative importance of the purposes compared with each other, particularly given that over time there will be a variation in the content of the publication or service. In such cases, an application for a certificate would be appropriate.

15/11/2001

AUTH 7.6

Applications for a certificate

01/12/2004

Pre-application contact

AUTH 7.6.1

A person considering applying for a certificate should, before sending in any application, contact the Enquiries and Applications Department (Authorisation Enquiries team) of the FSA to discuss whether a certificate may be appropriate.

01/07/2003

Form of application

AUTH 7.6.2

(1) An application should be made by the proprietor of the relevant publication or service using a form which can be obtained from the Enquiries and Applications Department (Authorisation Enquiries team) of the FSA. The form asks for general information about the applicant and gives guidance notes on completion and other details of how the FSA can help.

(2) An applicant will be asked to state his own view of the principal purpose of the publication or service. This should include an explanation why the applicant believes that he qualifies for the exclusion and why he believes that a certificate may be called for.

(3) The applicant will be asked to define the extent of the publication or service for which he is seeking a certificate.

(4) The applicant will be asked to supply material to demonstrate the content of the publication or service or, in the case of a new publication or service, its proposed content. For an existing publication or service, past samples should be supplied in the form most appropriate to the medium for which certification is sought. The samples should be chosen on the basis that they are representative of the publication or service as a whole and as it appears from time to time. The applicant will be asked to justify the selection of the particular samples as being representative. For a new publication or service, samples of proposed content should be supplied. These should be as comprehensive as possible.

(5) The applicant will be asked to supply material to demonstrate that the principal purpose is not liable to change over the foreseeable future. This may, for example, include business plans, a statement of editorial policy and marketing literature.

(6) The application must be accompanied by the application fee (see AUTH 7.6.5 G).

01/07/2003

Requests for further information

AUTH 7.6.3

After an application is sent in, the FSA may, on occasion, need to obtain additional information from the applicant or elsewhere to enable it to process the application.

15/11/2001

Time for processing applications

AUTH 7.6.4

The Act does not specify a time limit for processing the application but the FSA intends to deal with an application as quickly as possible. The more complete and relevant the information provided by an applicant, the more quickly a decision can be expected. But on occasion it may be necessary to allow time in which the FSA can monitor the content of the service. This might happen where, for example, a service is in a form that makes record keeping difficult (such as a large website with a number of hypertext links).

15/11/2001

Application Fee

AUTH 7.6.5

The fee for an application for a certificate under article 54 of the Regulated Activities Order is ???2,000 (see AUTH 4 Annex 1).

15/11/2001

The FSA's approach to considering applications

AUTH 7.6.6

The FSA will consider any application for a certificate on its merits.

15/11/2001

AUTH 7.6.7

Before it gives a certificate, the FSA must be satisfied that the principal purpose of the publication or service is neither of the purposes referred to in the exclusion (see AUTH 7.4.5 G). If there is insufficient evidence, a certificate cannot be given.

15/11/2001

AUTH 7.6.8

The FSA will form an overall view as to the purpose (or purposes) underlying the publication or service. It will then determine whether the principal purpose is neither of those referred to in article 54 of the Regulated Activities Order. Because the possible range of subject matter covered by different publications or services is very wide it is not possible to apply standard tests. The FSA will form a judgment as to the overall impression created by the publication or service. For example, the proportion of advice, compared with other material in the publication or service, will be relevant in determining the principal purpose of the publication or service. But this will not necessarily be conclusive one way or the other. The purpose of a publication or service may still be to give advice even if only a small proportion of the space is devoted to advice as such. This might happen if, for example, a publication were marketed primarily on the basis that it contains advice on investments.

15/11/2001

AUTH 7.6.9

In reaching a view, the FSA will take into account both editorial and promotional material in the publication or service. It will also have regard to the stated purpose of the publication or service and to any other material relevant to its purpose.

15/11/2001

AUTH 7.6.10

Other factors relevant to an assessment of purpose or content of the publication or service may vary depending on the nature of the publication or service. For example, if a service is provided by a website, consideration of the content of the publication or service will take account of hypertext links and other features such as e-mail addresses, bulletin boards and chat rooms.

15/11/2001

Grant of application

AUTH 7.6.11

If the FSA decides to grant the application it will issue a certificate. The certificate will normally be granted for an indefinite period. It will state what it is that the FSA considers constitutes the periodical or service in relation to which the FSA is satisfied that the exclusion in article 54 of the Regulated Activities Order applies. In many cases this will be self-evident. But it may sometimes be necessary to include further details in the certificate indicating what the certificate covers. For example, in the case of a large website, a distinct publication or service may form part of the website. In such a case a certificate may be given for that part only.

15/11/2001

Refusal of application

AUTH 7.6.12

An application may be refused on the grounds that the FSA is not satisfied that the principal purpose of the publication or service is neither of those mentioned in article 54(1)(a) or (b) of the Regulated Activities Order (see AUTH 7.4.5 G). An application may also be refused on the grounds that the FSA considers that the vehicle through which advice is to be given is not a newspaper, journal, magazine or other periodical publication, a regularly updated news or information service or a service consisting of the broadcast or transmission of television or radio programmes. Where an application is refused, the FSA will issue a notice which will give a statement of the reasons for the refusal in that case. If the application is refused, the applicant, if he is an unauthorised person, will need to consider whether it is appropriate to continue to publish the periodical or provide the service without authorisation or exemption.

15/11/2001

AUTH 7.7

Post certification issues

01/12/2004

Ongoing monitoring

AUTH 7.7.1

If a certificate is granted then, until it is revoked, it is conclusive evidence that the exclusion under article 54 of the Regulated Activities Order applies. A person to whom a certificate is given should notify the FSA of any significant changes to the purpose or nature of the content of the relevant publication or service. The FSA will need to keep the content of the publication or service in question under review.

15/11/2001

AUTH 7.7.2

An annual fee of £1,000 will be charged to meet the costs of ongoing monitoring (see SUP 20 Annex 3).

01/04/2004

Revocation of certificate

AUTH 7.7.3

The FSA may revoke a certificate at the request of its holder or on the FSA's own initiative if the FSA considers that it is no longer justified. If the FSA revokes a certificate on its own initiative, it would normally expect to give advance notice to the holder of the certificate together with a statement of the reasons for the proposed revocation, and give the holder of the certificate an opportunity to make representations. Where a certificate is revoked, the holder of the certificate, if he is an unauthorised person, will need to consider whether it is appropriate to continue to publish the periodical or provide the service without authorisation or exemption.

15/11/2001

Publication of details of certificate holders

AUTH 7.7.4

The fact of a person holding a certificate granted under article 54(3) is information which may be of relevance to other persons (including investors or potential investors). For this reason, the FSA considers it appropriate that details of certificates granted under article 54(3) should be included in a list on the public record which the FSA is required to maintain under section 347 of the Act (The record of authorised persons, etc).

15/11/2001

Further information

AUTH 7.7.5

For further information contact the Enquiries and Applications Department (Authorisation Enquiries team) at the FSA (see AUTH 1.9.2 G).

01/07/2003

AUTH 8

Determining applications

AUTH 8.1

Application and purpose

01/12/2004

Application

AUTH 8.1.1

This chapter applies to:

(1) an applicant for Part IV permission (including an applicant for top-up permission) which has made an application to carry on regulated activities in the United Kingdom; and

(2) a person for whom an application for approval under section 59 of the Act (Approval for particular arrangements) has been made with an application for Part IV permission (including an application for top-up permission).

03/09/2001

Purpose

AUTH 8.1.2

AUTH 8 gives applicants an overview of how their applications for Part IV permission and for approval of a candidate under section 59 of the Act will be determined. This overview includes a summary of the decision making procedures which apply to those decisions, within the scope of AUTH, that are subject to a statutory requirement to issue formal notices.

03/09/2001

AUTH 8.1.3

Statutory notices include warning notices and decision notices. If the FSA proposes or decides to take certain action in respect of an application within the scope of AUTH, it is required by the Act to give a warning notice or a decision notice. These statutory notices have specified procedures and specific actions and protections.

03/09/2001

AUTH 8.1.4

This chapter is only a summary and is not part of the FSA's formal statement of procedure under section 395 of the Act (The FSA's procedures). An applicant needing further details of the FSA's procedure should refer to the Decision making manual (DEC).

03/09/2001

AUTH 8.1.5

For guidance on the FSA's procedures before it determines an application, see:

(1) AUTH 3 (Applications for Part IV permission) for applications for Part IV permission; and

(2) AUTH 6 (Approved persons) for applications for approval of a candidate under section 59 of the Act, made with an application for Part IV permission.

03/09/2001

AUTH 8.2

Determination of an application

01/12/2004

Who makes the determination?

AUTH 8.2.1

A decision to determine an application for Part IV permission, or an application for approval under section 59 of the Act, is taken in one of two ways:

(1) by internal staff procedures involving FSA staff at an appropriate level of seniority, if the decision is to grant the application on the terms applied for (this decision does not involve giving a statutory notice); or

(2) by the FSA's Regulatory Decisions Committee (RDC), in any other case (this decision does involve the giving of a statutory notice).

03/09/2001

AUTH 8.2.2

The decision on an application will be taken by the RDC where FSA staff have recommended:

(1) the refusal, or proposed refusal, of:

(a) an application for Part IV permission (sections 52(7) and 52(9)(c)) of the Act (Determination of applications)); or

(b) an application for approval under section 59 of the Act made with an application for Part IV permission (sections 62(2) and 62(3) of the Act (Applications for approval: procedure and right to refer to the Tribunal)); and

(2) the grant, or proposed grant, of an application for Part IV permission subject to a limitation or requirement which was not applied for by the applicant or with a narrower description of regulated activity than that to which the application relates (sections 52(6)(a) and 52(9)(a) of the Act).

03/09/2001

What are internal staff procedures?

AUTH 8.2.3

The FSA Board has given FSA staff the authority to grant applications on the terms applied for. The majority of applications are determined by internal staff procedures.

03/09/2001

AUTH 8.2.4

As part of its application for Part IV permission, an applicant may apply for permission which includes a limitation (for example, a limitation on client categories), or a requirement (for example, a requirement not to hold or control client money). Limitations and requirements may be applied for in the application pack, or in a revision to the application pack submitted by the applicant if, for example, its business plans have changed. In those situations, FSA staff have authority to grant the application, on the terms applied for, using internal staff procedures.

03/09/2001

An overview of internal staff procedures

AUTH 8.2.5

(1) Internal staff procedures for decisions within the scope of AUTH are intended to ensure that decisions will, so far as possible, be taken by FSA staff with a good knowledge and understanding of:

(a) the application concerned; and

(b) other relevant factors in the general context of the application.

(2) They are also designed to ensure that applicants with routine applications obtain a decision as quickly as the nature of their application allows.

03/09/2001

AUTH 8.2.6

(1) Internal staff procedures provide for relevant aspects of the application to be taken fully into account and require that decisions are taken by FSA staff with appropriate experience. Decisions to grant the majority of applications for approval of a candidate, which are more routine in nature, may be made by a single individual, subject to appropriate oversight.

(2) The FSA has established staff committees which may grant an application for Part IV permission, or approval under Part V of the Act, as appropriate. The Authorisation and Approvals Committee will consider an application where, for example, it is complex or sensitive and the recommendation is to refer the application to the RDC to give a warning notice. The chairman of the Authorisation and Approvals Committee is the director responsible for authorisation decisions and its members are senior staff at the FSA.

21/02/2002

AUTH 8.2.7

The FSA keeps a record of each decision taken by internal staff procedures. This includes the names of the FSA staff taking the decision, the nature of the decision, the date it was taken and the information taken into account in arriving at the decision.

03/09/2001

AUTH 8.2.8

FSA staff are required by their contract of employment to comply with a code of conduct which imposes strict rules to cover the handling of conflicts of interest which may arise from personal interests or associations. FSA staff who are subject to a conflict of interest must declare that interest to the person to whom they are directly responsible for the decision. This individual to whom the conflict of interest is declared will decide whether that conflict precludes the involvement of the FSA staff member in making a decision.

03/09/2001

The Regulatory Decisions Committee

AUTH 8.2.9

The RDC is appointed by the FSA Board to exercise certain regulatory powers on behalf of the FSA Board. It is fully and directly accountable to the FSA Board for the decisions it makes. The RDC is a body outside the FSA's management structure.

03/09/2001

AUTH 8.2.10

The RDC has a Chairman, one or more Deputy Chairmen, and other members. Other than the Chairman, none of the members of the RDC is an employee of the FSA. Members are:

(1) current and recently retired practitioners with financial services industry skills and knowledge; and

(2) other suitable individuals representing the public interest.

03/09/2001

AUTH 8.2.11

For full details of the RDC and its procedures see DEC 4 (The decision maker). All decisions involving giving of statutory notices within the scope of AUTH will be determined by the RDC (see AUTH 8.2.2 G).

03/09/2001

AUTH 8.2.12

FSA staff are responsible for assembling and assessing the information required by the RDC and making recommendations to the RDC. Section 395 of the Act, however, requires the FSA to have procedures under which a decision which gives rise to a statutory notice is "taken by a person not directly involved in establishing the evidence on which that decision is based." So, the RDC is not directly involved in establishing the evidence on which decisions are based.

03/09/2001

AUTH 8.3

Statutory notices and other matters

01/12/2004

AUTH 8.3.1

A statutory notice includes a warning notice (see AUTH 8.3.2 G to AUTH 8.3.5 G) and a decision notice (see AUTH 8.3.8 G to AUTH 8.3.10 G). A final notice will also be given to a person which has received a decision notice (see AUTH 8.3.14 G to AUTH 8.3.16 G). See AUTH 8 Annex 1 G.

03/09/2001

Warning notices

AUTH 8.3.2

A warning notice warns the recipient that the FSA proposes to take certain action and gives an opportunity for representations to be made to the FSA before a decision is made.

03/09/2001

AUTH 8.3.3

FSA staff will review each application that falls within the scope of AUTH. Where they consider that the application should be refused, or should be granted subject to a limitation or a requirement which was not applied for, or with a narrower description of regulated activity than that to which the application relates (see AUTH 8.2.2 G), they will recommend to the RDC that a warning notice be given.

03/09/2001

AUTH 8.3.4

After considering the FSA staff recommendation, the RDC may decide to grant the application on the terms applied for. However, the RDC will decide to give a warning notice to the applicant, or, in the case of applications for approval under section 59 of the Act, to all interested parties, if it proposes that any of the following actions be taken:

(1) grant an application for Part IV permission either with a limitation or requirement which was not applied for, or with a narrower description of regulated activity than that to which the application relates (see AUTH 3), under section 52(6)(a) of the Act; or

(2) refuse to grant an application for Part IV permission (see AUTH 3) under section 52(7) of the Act; or

(3) refuse to grant an application for approval under section 59 of the Act (see AUTH 6) under section 62(2) of the Act.

03/09/2001

AUTH 8.3.5

For full details of warning notices and the warning notice procedure, see DEC 2.2 (Warning notice procedure).

03/09/2001

Representations

AUTH 8.3.6

The warning notice will contain a statement that the person concerned is entitled to make representations to the RDC. It will specify a reasonable time period, of not less than 28 business days from receiving the warning notice, within which the person to whom it is given may make representations to the RDC.

03/09/2001

AUTH 8.3.7

The procedures for making representations to the RDC are set out in DEC 4.4 (Representations).

03/09/2001

Decision notices

AUTH 8.3.8

A decision notice states the action the FSA has decided to take. For the purpose of an application within the scope of AUTH, the decision notice represents the FSA's determination of the application.

03/09/2001

AUTH 8.3.9

After considering any written and oral representations, the RDC may decide to grant the application on the terms applied for. However, the RDC will decide to give a decision notice to the persons to whom the warning notice was given if it decides that any of the following actions be taken:

(1) grant an application for Part IV permission with a limitation or requirement which was not applied for, or with a narrower description of regulated activity than those to which the application relates (see AUTH 3), under section 52(9)(a) of the Act; or

(2) refuse to grant an application for Part IV permission (see AUTH 3) under section 52(9)(c) of the Act; or

(3) refuse to grant an application for approval under section 59 of the Act (see AUTH 6) under section 62(3) of the Act.

03/09/2001

AUTH 8.3.10

For full details of final notices and the final notice procedure, see DEC 2.3.10 G to DEC 2.3.11 G

03/09/2001

Reference to the Financial Services and Markets Tribunal

AUTH 8.3.11

(1) Any person who receives a decision notice is entitled to refer the FSA's decision to the Tribunal.

(2) Under section 133(1) of the Act (Proceedings: general provision), any reference must be made within 28 days of the date when the decision notice is given, or within any other period that may be prescribed in the Tribunal rules.

(3) The Tribunal is appointed by the Lord Chancellor's Department.

03/09/2001

AUTH 8.3.12

A reference to the Tribunal will be a full rehearing and not an appeal. See DEC 5.1 (The Tribunal) for the procedure on referring cases to the Tribunal.

03/09/2001

AUTH 8.3.13

Any party to a reference to the Tribunal may appeal against the Tribunal's decision on a point of law to the Court of Appeal or, in Scotland, to the Court of Session.

03/09/2001

Final notices

AUTH 8.3.14

The FSA will give a final notice to the person that received a decision notice if the FSA:

(1) takes the action set out in the decision notice (if a reference to the Tribunal has not been made and the time limit for making references has passed); or

(2) takes action in accordance with any directions given by the Tribunal or the court under section 137 of the Act (Appeal on a point of law) where the matter was referred to the Tribunal.

03/09/2001

AUTH 8.3.15

The final notice will state the action being taken and the date on which it is to be taken.

03/09/2001

AUTH 8.3.16

For full details of final notices and the final notice procedure, see DEC 2.3.10 G to DEC 2.3.11 G

03/09/2001

Publication

AUTH 8.3.17

Details on the publication of decisions are set out in DEC 5.2 (Publication).

03/09/2001

AUTH 8.3.18

In the case of a decision within the scope of AUTH, the FSA's policy is to publish relevant details about the decision. The details may include the identity of the applicant or the name of any person who is the subject of an application such as an application for approval under section 60 of the Act. Other details may include the nature of the application and grounds for the decision. The FSA will seek to publish these details in a way which is fair to the person who is named and which is not prejudicial to the interests of consumers.

01/11/2004

AUTH 8 Annex 1

Determining applications

01/12/2004

AUTH 8 Annex 1

The FSA's decision making procedures for applications involving warning notices and decision notices

03/09/2001

AUTH App 1

Appendix 1. Financial promotion and related activities

AUTH App 1.1

Application and purpose

01/12/2004

Application

AUTH App 1.1.1

This appendix applies to persons who need to know whether their communications are subject to or comply with the Act. It also helps them decide whether their activities in making or helping others to make financial promotions are regulated activities.

01/06/2002

Purpose of guidance

AUTH App 1.1.2

The purpose of this guidance is two fold:

(1) to outline the restriction on financial promotion under section 21 of the Act (Restrictions on financial promotion) and the main exemptions from this restriction; and

(2) to outline the main circumstances in which persons who are primarily involved in making or helping others to make financial promotions may be conducting regulated activities requiring authorisation or exemption themselves; this part of the guidance may also be of more general relevance to persons who may be concerned whether or not they are carrying on the regulated activities of advising on investments or making arrangements with a view to transactions in investments.

01/10/2002

AUTH App 1.1.3

In particular, this guidance covers:

(1) invitations and inducements (see AUTH App 1.4);

(2) meaning of 'in the course of business' (see AUTH App 1.5);

(3) meaning of 'communicate' (see AUTH App 1.6);

(4) meaning of 'engage in investment activity' (see AUTH App 1.7);

(5) meaning of 'having an effect in the United Kingdom' (see AUTH App 1.8);

(6) circumstances where the restriction in section 21 does not apply (see AUTH App 1.9);

(7) types of financial promotion, including:

(a) meaning of 'real time financial promotion' (see AUTH App 1.10.2 G); and

(b) meaning of 'unsolicited real time financial promotion' (see AUTH App 1.10.8 G);

(8) types of exemption under the Financial Promotion Order, including:

(a) exemption for certain one-off promotions (see AUTH App 1.14.3 G);

(b) exemption for financial promotions not directed at the United Kingdom (see AUTH App 1.12.2 G);

(9) financial promotions concerning deposits and contracts of insurance other than life policies (see AUTH App 1.13);

(10) financial promotions concerning promotions by members of the professions (see AUTH App 1.15);

(11) financial promotions concerning funeral plans (see AUTH App 1.16);

(12) financial promotions concerning the Lloyd's market (see AUTH App 1.18);

(13) additional restrictions on the promotion of:

(a) life policies (see AUTH App 1.19);

(b) collective investment schemes (see AUTH App 1.20);

(14) company statements, announcements and briefings (see AUTH App 1.21);

(15) financial promotions made on the Internet (see AUTH App 1.22);

(16) regulated activities:

(a) advising on investments (see AUTH App 1.24);

(b) making arrangements with a view to transactions in investments (see AUTH App 1.32); and

(17) the business test for regulated activities (see AUTH App 1.34).

01/06/2002

AUTH App 1.1.4

This guidance is issued under section 157 of the Act. It represents the FSA's views and does not bind the courts. For example, it would not bind the courts in an action for damages brought by a private person for breach of a rule (see section 150 of the Act (Actions for damages)), or in relation to the enforceability of a contract where there has been a breach of sections 19 (The general prohibition) or 21 (Restrictions on financial promotion) of the Act (see sections 26 to 30 of the Act (Enforceability of agreements)). Although the guidance does not bind the courts, it may be of persuasive effect for a court considering whether it would be just and equitable to allow a contract to be enforced (see sections 28(3) and 30(4) of the Act). Anyone reading this guidance should refer to the Act and to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (SI 2001/1335) (as amended) (the Financial Promotion Order) and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (as amended) (the Regulated Activities Order). These should be used to find out the precise scope and effect of any particular provision referred to in the guidance and any reader should consider seeking legal advice if doubt remains. If a person acts in line with the guidance in the circumstances mentioned by it, the FSA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates.

01/06/2002

AUTH App 1.2

Introduction

01/12/2004

AUTH App 1.2.1

The effect of section 21 of the Act (Restrictions on financial promotion) is that in the course of business, an unauthorised person must not communicate an invitation or inducement to engage in investment activity unless either the content of the communication is approved for the purposes of section 21 by an authorised person or it is exempt. Under section 25 of the Act (Contravention of section 21), a person commits a criminal offence if he carries on activities in breach of the restriction in section 21 of the Act. A person who commits this criminal offence is subject to a maximum of two years imprisonment and an unlimited fine. However, it is a defence for a person to show that he took all reasonable precautions and used all due diligence to avoid committing the offence.

01/06/2002

AUTH App 1.2.2

Another consequence of a breach of section 21 of the Act is that certain agreements could be unenforceable (see section 30 of the Act (Enforceability of agreements resulting from unlawful communications)). This applies to agreements entered into by a person as a customer as a consequence of a communication made in breach of section 21.

01/06/2002

AUTH App 1.2.3

An authorised person will not breach section 21 when communicating a financial promotion. Nevertheless, this guidance may be relevant where an authorised person needs to know whether COB 3 (Financial promotion) applies to a particular communication. For example, to find out if the communication would be subject to an exemption if it were made by an unauthorised person (see COB 3.2.3A R and COB 3.2.5 R).

01/06/2002

AUTH App 1.2.4

A person who is concerned to know whether his communications will require approval or, if he is an authorised person, whether COB 3 will apply to his communications will need to consider the following:

(1) am I making a communication or causing a communication to be made? (see AUTH App 1.6);

(2) if so, is it an invitation or inducement? (see AUTH App 1.4);

(3) if so, does the invitation or inducement relate to a controlled investment? (see AUTH App 1.7);

(4) if so, is the invitation or inducement to engage in investment activity? (see AUTH App 1.7);

(5) if so, is it made in the course of business? (see AUTH App 1.5);

(6) if so, and the financial promotion originates outside the United Kingdom, is it capable of having an effect in the United Kingdom? (see AUTH App 1.8);

(7) if so, or if the answer to (5) is yes and the financial promotion was made in the United Kingdom, is the promotion exempt? (see AUTH App 1.12 to AUTH App 1.15 and AUTH App 1.21).

(8) if not, am I an authorised person?

01/06/2002

AUTH App 1.2.5

If the answer to AUTH App 1.2.4 G (8) is yes then COB 3 will apply (subject to additional exemptions in COB 3.2.5 R). If the answer is no, then the promotion must be approved by an authorised person if it is a non-real time financial promotion. Authorised persons are not allowed to approve real time financial promotion (see COB 3.12.2 R). AUTH App 1.36.2 G contains a flowchart explaining these steps.

01/06/2002

AUTH App 1.2.6

One of the main effects of the Act is to bring together in one statute the regulation of persons who provide financial services. These would previously have been regulated under the Financial Services Act 1986, the Banking Act 1987, the Insurance Companies Act 1982 or under laws relating to building societies, friendly societies and credit unions. The Act also consolidates the provisions of those statutes which governed advertising and making unsolicited personal communications.

01/06/2002

AUTH App 1.2.7

The restriction in section 21 applies to all forms of communication such as advertising, broadcasts, websites, e-mails and all other forms of written or oral communication whether sent to one person or many. However, the restrictions only apply to a communication made in the course of business and not, for example, to personal communications between individuals.

01/06/2002

AUTH App 1.2.8

There are extensive exemptions in the Financial Promotion Order. This is explained in greater detail in AUTH App 1.11 to AUTH App 1.15 and AUTH App 1.21.

01/06/2002

AUTH App 1.3

Financial promotion

01/12/2004

AUTH App 1.3.1

The basic restriction on the communication of financial promotions is in section 21(1) of the Act. Sections 21(2) and (5) disapply the restriction in certain circumstances. Their combined effect is that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless:

(1) he is an authorised person; or

(2) the content of the communication is approved for the purposes of section 21 by an authorised person; or

(3) the communication is exempt under an order made by the Treasury under section 21(5) - the Financial Promotion Order (as amended).

01/06/2002

AUTH App 1.3.2

Section 21 of the Act does not itself (other than in its heading and side-note) refer to a 'financial promotion' but rather to the communication of 'an invitation or inducement to engage in investment activity'. References in this guidance to a financial promotion mean an invitation or inducement to engage in investment activity.

01/06/2002

AUTH App 1.3.3

Section 21 of the Act contains a number of key expressions or phrases which will determine whether or not it will apply. These are:

(1) 'invitation or inducement' (see AUTH App 1.4);

(2) 'in the course of business' (see AUTH App 1.5);

(3) 'communicate' (see AUTH App 1.6);

(4) 'engage in investment activity' (see AUTH App 1.7); and

(5) 'having an effect in the United Kingdom' (see AUTH App 1.8).

01/06/2002

AUTH App 1.3.4

The FSA's views as to the meaning of these are explained in AUTH App 1.4 to AUTH App 1.8.

01/06/2002

AUTH App 1.3.5

In addition, this guidance deals with other factors such as when the exemptions in the Financial Promotion Order can be applied, including the exemptions relating to territorial scope and one-off financial promotions.

01/06/2002

AUTH App 1.3.6

Section 21 of the Act was commenced, for most purposes, on 1 December 2001. However, it did not come into effect as respects financial promotions about funeral plan contracts until 1 January 2002 and will not come into effect for financial promotions about agreements for qualifying credit until a date in 2004 yet to be set by the Treasury. Guidance on the application of section 21 to financial promotions about funeral plans is in AUTH App 1.16.

01/06/2002

AUTH App 1.4

Invitation or inducement

01/12/2004

Promotional element

AUTH App 1.4.1

The Act does not contain any definition of the expressions 'invitation' or 'inducement', leaving them to their natural meaning. The ordinary dictionary entries for 'invitation' and 'inducement' offer several possible meanings to the expressions. An 'invitation' is capable of meanings ranging from merely asking graciously or making a request to encouraging or soliciting. The expression 'inducement' is given meanings ranging from merely bringing about to prevailing upon or persuading. In the FSA's view it is appropriate, in interpreting the expressions, to take due account of the context in which they are being used and their purpose.

01/06/2002

AUTH App 1.4.2

The Treasury, responding to consultation on the draft Financial Promotion Order, stated its intention that only communications containing a degree of incitement would amount to 'inducements' and that communications of purely factual information would not. This is provided the facts are presented in such a way that they do not also amount to an invitation or inducement. This was made clear both in the Treasury's consultation document on financial promotion and during the passage of the Act through Parliament. Under questioning, the Minister confirmed that the government's policy was 'to capture promotional communications only'. The Minister also stated that 'inducement', in its Bill usage, already incorporates an element of design or purpose on the part of the person making the communication and that 'design or purpose is implicit in this context' (Hansard HL, 18 May 2000 cols 387 and 388). In the same debate, the Minister stated that the restriction would not apply to such things as 'public announcements, exchange of draft share purchase agreements in corporate finance transactions or cases in which the recipient of a communication simply misunderstands its contents and engages in investment activity as a result'.

01/06/2002

AUTH App 1.4.3

The FSA recognises that the matter cannot be without doubt. However, it is the FSA's view that the context in which the expressions 'invitation' or 'inducement' are used clearly suggests that the purpose of section 21 is to regulate communications which have a promotional element. This is because they are used as restrictions on the making of financial promotions which are intended to have a similar effect to restrictions on advertising and unsolicited personal communications in earlier legislation. Such communications may be distinguished from those which seek merely to inform or educate about the mechanics or risks of investment. In this respect, the FSA supports the views expressed by Ministers as referred to in AUTH App 1.4.2 G. To the extent that doubt may remain as to the true meaning of 'invitation' or 'inducement' when used in section 21, it is the opinion of the FSA that the courts are likely to take account of the ministerial statements under the judgement in Pepper (Inspector of Taxes) v Hart [1993] AC593.

01/06/2002

AUTH App 1.4.4

The FSA considers that it is appropriate to apply an objective test to decide whether a communication is an invitation or an inducement. In the FSA's view, the essential elements of an invitation or an inducement under section 21 are that it must both have the purpose or intent of leading a person to engage in investment activity and be promotional in nature. So it must seek, on its face, to persuade or incite the recipient to engage in investment activity. The objective test may be summarised as follows. Would a reasonable observer, taking account of all the circumstances at the time the communication was made:

(1) consider that the communicator intended the communication to persuade or incite the recipient to engage in investment activity or that that was its purpose; and

(2) regard the communication as seeking to persuade or incite the recipient to engage in investment activity.

It follows that a communication which does not have any element of persuasion or incitement will not be an invitation or inducement under section 21.

01/06/2002

Invitations

AUTH App 1.4.5

An invitation is something which directly invites a person to take a step which will result in his engaging in investment activity. It follows that the invitation must cause the engaging in investment activity. Examples of an invitation include:

(1) direct offer financial promotions;

(2) a prospectus with application forms; and

(3) Internet promotions by brokers where the response by the recipient will initiate the activity (such as 'register with us now and begin dealing online').

A communication may contain a statement that it is not an invitation. Such statements may be regarded as evidence that the communication is not an invitation unless its contents indicate otherwise.

01/06/2002

AUTH App 1.4.6

Merely asking a person if they wish to enter into an agreement with no element of persuasion or incitement will not, in the FSA's view, be an invitation under section 21. For example, the FSA does not consider an invitation to have been made where:

(1) a trustee or nominee receives an offer document of some kind and asks the beneficial owner whether he wishes it to be accepted or declined;

(2) a person such as a professional adviser enquires whether or not his client would be willing to sign an agreement; or

(3) a person is asked to sign an agreement on terms which he has already accepted or to give effect to something which he has already agreed to do.

01/06/2002

Inducements

AUTH App 1.4.7

An inducement may often be followed by an invitation or vice versa (in which case both communications will be subject to the restriction in section 21 of the Act). An inducement may be described as a link in a chain where the chain is intended to lead ultimately to an agreement to engage in investment activity. But this does not mean that all the links in the chain will be an inducement or that every inducement will be one to engage in investment activity. Only those that are a significant step in persuading or inciting or seeking to persuade or incite a recipient to engage in investment activity will be inducements under section 21. The FSA takes the view that the mere fact that a communication may be made at a preliminary stage does not, itself, prevent that communication from being a significant step. However, in many cases a preliminary communication may simply be an inducement to contact the communicator to find out what he has to offer. For example, an advertisement which merely holds out a person as having expertise in or providing services about investment management or venture capital will not be an inducement to engage in investment activity. It will merely be an inducement to make contact for further material and will not be a significant step in the chain. However, that further material may well be a significant step and an invitation or inducement to engage in investment activity. In contrast, an advertisement which claims that what the recipient should do in order to make his fortune is to invest in securities and that the communicator can provide him with the services to achieve that aim will be a significant step and an inducement to engage in investment activity.

01/06/2002

AUTH App 1.4.8

AUTH App 1.4.9 G to AUTH App 1.4.34 G apply the principles in AUTH App 1.4.4 G to AUTH App 1.4.7 G to communications made in certain circumstances. They do not seek to qualify those principles in any way. A common issue in these circumstances arises when contact details are given (for example, of a provider of investments or investment services). In the FSA's view, the inclusion of contact details should not in itself decide whether the item in which they appear is an inducement or, if so, is an inducement to engage in investment activity. However, they are a factor which should be taken into account. The examples also refer, where appropriate, to specific exemptions which may be relevant if a communication is an invitation or inducement to engage in investment activity.

01/06/2002

Directory listings

AUTH App 1.4.9

Ordinary telephone directory entries which merely list names and contact details (for example where they are grouped together under a heading such as 'stockbrokers') will not be inducements. They will be sources of information. Were they to be presented in a promotional manner or accompanied by promotional material they would be capable of being inducements. Even so, they may merely be inducements to make contact with the listed person. Specialist directories such as ones providing details of venture capital providers, unit trust managers or investment trusts will usually carry greater detail about the services or products offered by the listed firms and are often produced by representatives bodies. Such directories may also be essentially sources of information. Whether or not this is the case where individual entries are concerned will depend on their contents. If they are not promotional, the entries will not be inducements to engage in investment activity. However, it is possible that other parts of such a directory might seek to persuade recipients that certain controlled investments offer the best opportunity for financial gain. They may go on to incite recipients to contact one of the member firms listed in the directory in order to make an investment. In such cases, that part of the directory will be an inducement to engage in investment activity. But this does not mean that the individual entries or any other part of the directory will be part of the inducement. AUTH App 1.6 provides guidance on the meaning of 'communicate' and 'causing a communication'. This is of relevance to this example and those which follow.

01/06/2002

Tombstone advertisements (announcements of a firm's past achievements)

AUTH App 1.4.10

Such advertisements are almost invariably intended to create awareness, hopefully generating future business. So they may or may not be inducements. This depends on the extent to which their contents seek to persuade or incite persons to contact the advertiser for details of its services or to do business with it. Merely stating past achievements with no contact details will not be enough to make such an advertisement an inducement. Providing contact details may give the advertisement enough of a promotional feel for it to be an inducement. But, if this is the case, it will be an inducement to contact the advertiser to find out information or to discuss what he can offer. Only if the advertisement contains other promotional matter will it be capable of being an inducement to engage in investment activity. In practice, such advertisements are often aimed at influencing only investment professionals. Where this is the case, the exemption in article 19 of the Financial Promotion Order (Investment professionals) may be relevant (see AUTH App 1.12.21 G). Tombstone advertisements will not usually carry the indicators required by article 19 to establish conclusive proof. However, article 19 may apply even if none of the indicators are present if the financial promotion is in fact directed at investment professionals.

01/06/2002

Links to a website

AUTH App 1.4.11

Links on a website may take different forms. Some will be inducements. Some of these will be inducements under section 21 and others not. Links which are activated merely by clicking on a name or logo will not be inducements. The links may be accompanied by or included within a narrative or, otherwise, referred to elsewhere on the site. Whether or not such narratives or references are inducements will depend upon the extent to which they may seek to persuade or incite persons to use the links. Simple statements such as 'these are links to stockbrokers' or 'click here to find out about stockmarkets' we provide links to all the big exchanges - will either not amount to inducements or be inducements to access another site to get information. If they are inducements, they will be inducements to engage in investment activity only if they specifically seek to persuade or incite persons to use the link for that purpose. Where this is the case, but the inducement does not identify any particular person as a provider of a controlled investment or as someone who carries on a controlled activity, the exemption in article 17 of the Financial Promotion Order (Generic promotions) may be relevant (see AUTH App 1.12.14 G).

01/06/2002

Banner advertisements on a website

AUTH App 1.4.12

These are the Internet equivalent to an advertisement in a newspaper and are almost bound to be inducements. So whether they are inducements to engage in investment activity will depend upon their contents as with any other form of advertising and the comments in AUTH App 1.4.11 G will be relevant.

01/06/2002

Publication or broadcast of prices of investments (historic or live)

AUTH App 1.4.13

These may or may not involve invitations or inducements. Where a person such as a newspaper publisher, broadcaster or data supplier merely presents prices of investments whether historic or live the information can be purely factual and not be an inducement. Historic prices on their own will never be invitations or inducements. Merely adding simple contact details to such prices will not make them invitations or inducements to engage in investment activity. However, any additional wording seeking to persuade or incite persons to contact firms so that they may buy or sell such investments may do so. In other circumstances, the publication of prices may involve an invitation or an inducement to engage in investment activity. For example, persons may use an electronic trading system to display prices and other terms such as lot size and volume at which they are prepared to deal, on screens viewed by potential counterparties. The price and other terms may be firm or indicative. The persons using the trading systems will have accepted the general terms and conditions for trading. Where prices and terms quoted are firm, the screen display may be an invitation to engage in investment activity by entering into a transaction at that price and on those terms. This will be where the offer may be accepted by the counterparty by a simple electronic response. Where the price or other terms are indicative, the screen display may be an inducement to engage in investment activity after negotiating acceptable terms. But in either case, the display of prices and other terms will only be invitations or inducements to engage in investment activity if it also contains material which seeks to persuade or incite the recipient to do so.

01/06/2002

Company statements and announcements and analyst briefings

AUTH App 1.4.14

Encouraging (or discouraging) statements may be made by a company director. These will typically be made in reports or accounts or at a presentation or road show or during a briefing of analysts. Alternatively, such statements may be made on the company's behalf by its public relations adviser. Statements of fact about a company's performance or activities will not, themselves, be inducements to engage in investment activity even if they may lead persons to decide to buy or sell the company's shares. However, statements which speculate about the company's future performance or its share price may have an underlying purpose or intent to encourage investors to act. If this is so, whether they will be inducements to engage in investment activity will depend entirely on their contents and the extent to which they seek to promote investment in the company. AUTH App 1.21 contains detailed guidance on the various exemptions which may apply in this area.

01/06/2002

Journalism

AUTH App 1.4.15

Journalism can take many forms. But typically a journalist may write an editorial piece on a listed company or about the investments or investment services that a particular firm provides. This may often be in response to a press release. The editorial may or may not contain details of or, on a website, a link to the site of the company or firm concerned. Such editorial may specifically recommend that readers should consider buying or selling investments (whether or not particular investments) or obtaining investment services (whether or not from a particular firm). If so, those recommendations are likely to be inducements to engage in investment activity (bearing in mind that a recommendation not to buy or sell investments cannot be an inducement to engage in investment activity). In other cases, the editorial may be an objective assessment or account of the investment or its issuer or of the investment firm and may not encourage persons to make an investment or obtain investment services. If so, it will not be an inducement to engage in investment activity. Article 20 of the Financial Promotion Order (Communications by journalists) contains a specific exemption for journalism and journalists may be able to make good use of the generic promotions exemption in article 17 of the Financial Promotion Order (see AUTH App 1.12.23 G and AUTH App 1.12.14 G). Journalists should bear in mind that they may communicate a financial promotion by repeating a recommendation that originates from another source. That source could be, for example, an authorised person, an academic or another publication. Such a financial promotion would be viewed as communicated by the journalist where he has editorial control over its form and content. In the FSA's view, a person is not causing the communication of a financial promotion merely by providing material, including a press release or a quotation, to a journalist who uses it in an article. This is provided that the person has no control over the way in which the article is prepared and published. The press release or quotation itself, if it is a financial promotion, should be exempt under article 47 of the Financial Promotion Order (Persons in the business of disseminating information) - see AUTH App 1.21.10 G.

01/06/2002

Performance tables

AUTH App 1.4.16

League tables showing the past performance of investment products of a particular kind or investment firms of a particular class (such as investment managers) and determined by the application of pre-set criteria will not, in themselves, be inducements. The fact that such tables represent pure information could, for example, be made clear by their being accompanied by a statement to the effect that the fact of a product or firm being well placed in the tables based on past performance is no guide to their likely future performance. The effectiveness of such a statement will, of course, depend upon it being the case that they do, in fact, represent mere information. But if, for example, the tables are accompanied by or presented or provided in a way that they are an actual or implied recommendation that a particular product's performance suggests it is a potential buy or sell they may become inducements.

01/06/2002

AUTH App 1.4.17

Tables or other forms of list may identify products with their relevant features such as interest rates, redemption periods and charges. Again, provided that the tables amount to purely factual information enabling comparison of products they will not be inducements. This includes such things as electronic systems that allow users to programme in their requirements and find details of the products that meet them. Producers of the table or list may, to some extent, expect that the information will lead persons to make investments. Or they might have negotiated a payment from the firms featured that reflects leads generated. In either case, the absence of a promotional element in the table will be determinative. As with performance tables, these can become inducements to engage in investment activity. This will happen when there is an actual or implied recommendation that either the products which come out best in respect of certain features or a specific combination of features or those that have been chosen for inclusion are likely to be good or best buys. This might, for example, include identifying the top ten deposit accounts for persons looking for deposit accounts offering certain features. The mere inclusion in tables of the kind referred to generally in this paragraph or those in AUTH App 1.4.16 G of contact details should not turn what is otherwise factual or neutral information into an inducement. Both types of table may benefit, if necessary, from the exemption for journalists in article 20 (see AUTH App 1.12.23 G). This will be where they are prepared by a person acting as a journalist and are included in a publication, service or broadcast as described in article 20(5)(b). Where the tables are merely a reproduction of information supplied by a third party data source which does not provide them as a journalist article 20 will not be available.

01/06/2002

Decision Trees

AUTH App 1.4.18

A decision tree (or flow chart) will generally be used in one of two ways. Either it will be an educational tool (for instance, where an employer wishes to help his employees understand their pension options) or a promotional tool. As an educational tool which does no more than enable a person to identify generic investment options it will not be an inducement. But if its use is intended to procure business for an investment firm then it is likely to be an inducement. For example, electronic decision trees on websites may typically invite persons to enter basic information about their circumstances and objectives leading to a recommendation or choice of products or services, or both, possibly with links to other firms' sites. These decision trees will be inducements to engage in investment activity although, in some cases, the journalists' exemption in article 20 of the Financial Promotion Order may be relevant (see AUTH App 1.12.23 G).

01/06/2002

Investment agreements, share purchase agreements and customer agreements

AUTH App 1.4.19

These types of agreements will only rarely be inducements or invitations. For instance, where the terms of a deal have been agreed in principle and the agreement is merely the means of giving it effect, the inducement phase has clearly passed. And an agreement or draft agreement itself may usually be seen as a document setting out the terms and conditions of a deal and not itself an inducement (or an invitation) to deal. However, an agreement or draft agreement may often be accompanied by an invitation or inducement such as a covering letter or an oral communication that seeks to persuade or incite a person to enter into the agreement. Whilst such accompaniments are capable of being inducements (or invitations), merely offering concessions or amendments to a draft agreement during negotiations will not turn those accompaniments into inducements. It is, however, possible for an agreement itself to be or to include an invitation or inducement. For example, an advertisement that contains the terms and conditions and the means to enter into it as a binding contract, a direct offer financial promotion or a prospectus with an application form included.

01/06/2002

Image advertising

AUTH App 1.4.20

Activities which are purely profile raising and which do not identify and promote particular investments or investment services may not amount to either an invitation or inducement of any kind. Examples of this include where listed companies sponsor sporting events or simply put their name or logo on the side of a bus or on an umbrella. This is usually done with a view, among other things, to putting their names in the minds of potential investors or consumers. In other cases, an image advertisement for a company which provides investment services (for example, on a pencil or a diary) may include, along with its name or logo, a reference to its being an investment adviser or fund manager or a telephone or fax number or both. Profile raising activities of this kind may involve an inducement (to contact the advertiser) but will be too far removed from any possible investment activity to be considered to be an inducement to engage in investment activity.

01/06/2002

Advertisements which invite contact with the advertiser

AUTH App 1.4.21

These will be advertisements that contain encouragement to contact the advertiser. They are likely to be inducements to do business with him or to get more information from him. If so, they will be inducements to engage in investment activity if they seek to persuade or incite persons to buy or sell investments or to get investment services. See AUTH App 1.4.7 G for more guidance on preliminary communications and whether they are a significant step in the chain of events which are intended to lead to the recipient engaging in investment activity. Where advertisements invite persons to send for a prospectus, article 73 (Material relating to prospectus for public offer of unlisted securities) may provide an exemption. Any financial promotion which contains more information than is allowed by article 73 but which is not the prospectus itself is likely to require approval by an authorised person unless another exemption applies. AUTH 1.9.1 G explains about approval.

01/06/2002

Introductions

AUTH App 1.4.22

Introductions may take many forms but typically involve an offer to make an introduction or action taken in response to an unsolicited request. An introduction may be an inducement if the introducer is actively seeking to persuade or incite the person he is introducing to do business with the person to whom the introduction is made. So it may fall under section 21 if its purpose is to lead to investment activity. For example, if a person answers the question 'do you or can you provide investment advice with a simple 'no, but I can introduce you to someone who does', that may be an inducement. But, if so, it is likely to be an inducement to contact someone to find out information about his services rather than to engage in investment activity. Where a person calls in to an office or branch of a company and asks to see 'the investment adviser', a person who responds merely by directing or showing the way is not making an inducement. Neither would a person be making an inducement by responding to an enquiry with 'we do not provide investment services' you need to consult an authorised person - or words to that effect. That is provided he does not go on to seek to persuade or incite the enquirer to contact a particular authorised person for investment services. But a person would be making an inducement to engage in investment activity if, for example, he seeks to persuade or incite persons to allow him to introduce them to a particular authorised person so that they may take advantage of the cheap dealing rates which that person offers. Where introductions do amount to inducements under section 21 they may fall under the exemption for generic promotions (article 17 of the Financial Promotion Order) (see AUTH App 1.12.14 G). This will be the case provided the financial promotion does not identify any particular investment or person to whom introductions are to be made or identify the introducer as a person who carries on a regulated activity (typically of making arrangements with a view to transactions in investments under article 25(2) of the Regulated Activities Order - (see AUTH App 1.33 (Introducing)) or making arrangements with a view to regulated mortgage contracts under Article 25A(2) of the Regulated Activities Order (see AUTH App 4.5 (Arranging regulated mortgage contracts)). It is most likely to apply where the financial promotion relates to deposits or contracts of insurance which are not contractually based investments. The journalists' exemption in article 20 of the Financial Promotion Order (Communications by journalists) may be relevant where the introduction is made through or in a publication, broadcast or regularly updated news or information service (see AUTH App 1.12.23 G). Article 15 (Introductions) may apply where the introduction is a real time financial promotions financial promotion (see AUTH App 1.12.11 G). In addition, Article 28B (Real time communications: introductions in connection with qualifying credit) may apply where an introduction that is a real time financial promotion relates to an agreement for qualifying credit (see AUTH App 1.17.12 G).

01/06/2002

Distributors

AUTH App 1.4.23

A person may be distributing financial promotions which have been issued or approved by an authorised person. This may be by displaying copies or delivering them or handing them out whether or not on request. AUTH App 1.6 explains when such a person will be communicating the financial promotions. Where this is so, the exemption for mere conduits in article 18 of the Financial Promotion Order may apply (see AUTH App 1.12.18 G). But article 18 will not apply if the distributor creates his own financial promotion by seeking to persuade or incite the recipient to act upon the financial promotions he is distributing.

01/06/2002

Investment trading methods and training courses

AUTH App 1.4.24

Trading methods and techniques, such as traded options training courses and software-based or manual trading tools will, in many cases, be too remote from any eventual investment dealing activities to be inducements to engage in investment activity. Promotions of such things will be inducements (or invitations) to receive training and general trading tips and techniques. However, such things may be sold on the basis that they are almost certain to produce profits from the trading which the recipient will undertake using the training or technique. If this is the case, the promotions are capable of being inducements to engage in those trading activities. Such financial promotions are capable of being generic promotions under article 17 of the Financial Promotion Order (see AUTH App 1.12.14 G).

01/06/2002

Invitations to attend meetings or to receive telephone calls or visits

AUTH App 1.4.25

These are clearly invitations or inducements. Whether they will involve invitations or inducements to engage in investment activity rather than to attend the meeting or receive the call or visit, will depend upon their purpose and content. AUTH App 1.4.7 G discusses communications which are a significant step in the chain of events leading to an agreement to engage in investment activity. The purpose of the meeting, call or visit to which the invitation or inducement relates may be to offer the audience or recipient investment services. In this case, the invitation or inducement will be a significant step in the chain if it seeks to persuade or incite the invitee to engage in investment activity at the meeting, call or visit. Any financial promotions made during the meeting, call or visit would still need to be communicated or approved by an authorised person or be exempt.

01/06/2002

Explanation of terms

AUTH App 1.4.26

An explanation of the terms of an agreement or of the consequences of taking a particular course of action can be merely factual information unless it includes or is accompanied by encouragement to enter into the agreement or take the course of action. The mere fact that the explanation may present the investment in a good light or otherwise influence the recipient will not make it an inducement. Where such communications are financial promotions they may fall under one of the exemptions for one-off promotions in articles 28 and 28A of the Financial Promotion Order (see AUTH App 1.14.3 G).

01/06/2002

Enquiries about a person's status or intentions

AUTH App 1.4.27

A person ('A') may enquire:

(1) whether another person is certified as a high net worth individual or a sophisticated investor so that A may determine whether an exemption applies;

(2) whether a person has received material sent to him; or

(3) how a person might propose to react to a take-over offer.

Enquiries of this or a similar kind will not amount to inducements to engage in investment activity unless they involve persuasion or incitement to do so. The enquiry may be accompanied by a brief statement of the reason why it is being made. This may, for example, include a reference to the type of investment to which any subsequent financial promotions would relate. Such initial enquiries may be followed up with an inducement but this fact alone will not turn the initial enquiry into a financial promotion. For example, an enquiry about whether a person is certified for the purposes of article 48 (Certified high net worth individuals) or article 50 (Sophisticated investors) may, where the answer is positive, be followed by a financial promotion. That financial promotion can then rely on article 48 or 50 as the case may be.

01/06/2002

Solicited and accompanying material

AUTH App 1.4.28

Solicited or accompanying material which does not contain any invitation or inducement to engage in investment activity will not itself be a financial promotion. This is provided that the material is not part of any financial promotion which may accompany it. This is explained in greater detail in AUTH App 1.4.29 G to AUTH App 1.4.30 G.

01/06/2002

AUTH App 1.4.29

Persons may sometimes be asked to send material which has not been prepared for use as a financial promotion to a person who is interested in making an investment. For example, a prospective participant in a Lloyd's syndicate may ask for a copy of the business plan or forecast prepared by the managing agent to comply with Lloyd's requirements. As another example, a prospective purchaser of, or investor in, a company may wish to see a valuation report, a due diligence report or legal advice. The fact that the person requesting the material may intend to rely on it in making his investment decision does not, itself, make the material an inducement under section 21.

01/06/2002

AUTH App 1.4.30

The person who responds to the request for the material in the circumstances in AUTH App 1.4.29 G may make a financial promotion in the form of a covering letter or oral communication ('C'). This will not mean that the material accompanying C must itself be treated as an inducement. This will depend on the circumstances. The material itself would only become an inducement if it is turned into part of the financial promotion in C. For example, C may refer to the contents or part of the contents of the accompanying material and claim that they will convince the recipient that he should engage in investment activity. In such a case, the contents, or the relevant part of the contents as the case may be, would become part of the financial promotion in C. In other cases, C may simply refer to the fact that certain material has been enclosed or is available without using it as a selling point to persuade or incite the recipient to engage in investment activity. In that case, the material will not become part of the financial promotion. A similar situation arises if a person other than the person who originated an oral or written communication which is not itself a financial promotion uses it to persuade or incite a potential investor.

01/06/2002

Telephone services

AUTH App 1.4.31

A person ('P') may be engaged, typically by investment product companies, to provide telephone services. Where such services require P to seek to persuade or incite prospective customers to receive investment literature or a personal call or visit from a representative of his principal they will frequently involve inducements to engage in investment activity. This is so whether the inducement results from P making unsolicited calls or by his raising the issue during a call made by the prospective customer. Generally speaking, it is likely that P would be carrying on a regulated activity under article 25(2) of the Regulated Activities Order and require authorisation or exemption (for example, as an appointed representative) if he is required to procure leads for his principal. In other cases, P may merely respond to a request from a prospective customer. This may be a request for investment literature or to arrange a call or visit. P will not be making an inducement simply by agreeing to send the literature, referring the caller to a representative of his principal or agreeing to arrange for the visit or call. Where persons providing telephone services are appointed representatives the exemption in article 16 of the Financial Promotion Order (Exempt persons) may apply (see AUTH App 1.12.12 G).

01/06/2002

Personal illustrations

AUTH App 1.4.32

A personal illustration (for instance, of the costs of and benefits under a particular investment product) may or may not be an invitation or inducement. This will depend on the extent to which it seeks to persuade or incite the recipient to invest as opposed to merely providing him with information. A personal illustration may, however, be accompanied by an invitation or inducement to buy the investment in which case the exemptions for one-off financial promotions in articles 28 or 28A may apply (see AUTH App 1.14.3 G). Authorised persons should note that, where personal quotations or illustrations do amount to a financial promotion COB 3 will not usually apply to them (see COB 3.2.5 R).

01/06/2002

Instructions or guidance on how to invest

AUTH App 1.4.33

Things such as help-lines for persons who wish to make an investment will not usually involve invitations or inducements to engage in investment activity. This is where their purpose is merely to explain or offer guidance on how to invest or to accept an offer. In such cases, the investor will already have decided to invest and there will be no element of persuasion on the part of the person giving the explanation or guidance.

01/06/2002

Communications by employers to their employees

AUTH App 1.4.34

Employers may communicate with their employees on matters which involve controlled investments. For example, personal pension schemes (including stakeholder schemes) and other employee benefit schemes other than occupational pension schemes. Interests under the trusts of an occupational pension scheme are not a controlled investment (see paragraph 27 (2) of Schedule 1 to the Financial Promotion Order). Such communications will only be invitations or inducements to engage in investment activity if they seek to persuade or incite employees to do things such as:

(1) participate in or leave the pension or other benefit scheme;

(2) exercise certain rights under such a scheme, include making additional contributions or exercising options.

Communications which are intended to educate or give employees information with no element of persuasion or incitement will not be invitations or inducements under section 21. Employers may wish to give their employees investment material prepared and approved by an authorised person. This material may be given under cover of a communication from the employer. If so, the covering communication will not itself be an inducement if all it does is to refer employees to the material and explain what they should do if they wish to act on it, without seeking to persuade or incite them to act. Where the covering communication is itself a financial promotion it will need to be approved by an authorised person provided it is a non-real time financial promotion unless an exemption applies. If it is a real time financial promotion it cannot be approved (see COB 3.12.2 R). In such cases, an exemption would need to apply. Where employee share schemes are concerned, the exemption in article 60 of the Financial Promotion Order (Participation in employee share schemes) is likely to apply to any financial promotions made by employers or members of their group. Where an employer's financial promotions relate to such things as company health or general insurance benefit packages, the exemptions in article 24 (Relevant insurance activity: non real time communications) or 26 (Relevant insurance activity: real time communications) of the Financial Promotion Order may apply. Any financial promotion made by an employer for the purpose of meeting his obligations under the Welfare Reform and Pensions Act 1999 to offer his employees a stakeholder pension scheme should be able to use the exemption in article 29 (Communications required or authorised by enactments).

01/06/2002

AUTH App 1.5

In the course of business

01/12/2004

AUTH App 1.5.1

Under section 21(4) of the Act, the Treasury has the power to specify circumstances in which a person is viewed as 'acting in the course of business' or 'not acting in the course of business'. The power under section 21(4) relates only to financial promotions and is distinct from the power in section 419 which relates to regulated activites. To date, the Treasury has not used the power in section 21(4). As a result, the phrase has its ordinary or natural meaning.

01/06/2002

AUTH App 1.5.2

The FSA considers that 'in the course of business' requires a commercial interest on the part of the communicator. This does not necessarily have to be a direct interest. And the communicator does not need to be carrying on regulated activities (the test in section 19 of the Act) as or as part of his business. Neither does the communication need to be made in the course of carrying on activities as a business in their own right (the test in article 3 of the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001). For example, if a holding company proposes to sell one of its subsidiaries, that sale will be 'in the course of business' irrespective of the fact that the company may well not be in the business of selling subsidiaries.

01/06/2002

AUTH App 1.5.3

The position is slightly more blurred with individuals. The 'in the course of business' test is intended to exclude genuine non-business communications. Examples of these would be friends talking in a pub, letters between family members or e-mails sent by individuals using an Internet chat-room or bulletin board for personal reasons. An issue arises where capital is raised for small private companies. Where such a company is already in operation, it will be acting 'in the course of business' when seeking to generate additional share or loan capital. At the pre-formation stage, however, it will often be the case that individuals who are proposing to run the company will approach a small number of friends, relatives and acquaintances to see if they are willing to provide start-up capital. In the FSA's view, such individuals will not be acting 'in the course of business' during the pre-formation stage of a small private company. This is provided that they are not:

(1) forming companies with such regularity that they would be regarded as carrying on the business of forming companies; or

(2) already running the business which the company will carry on (for example, as a partnership).

01/06/2002

AUTH App 1.5.4

There is, of course, no reason why an individual cannot act 'in the course of business'. For example, sole traders who are independent financial advisers will give investment advice 'in the course of business' and so satisfy the test. Individuals who are merely seeking to make personal investments will not be acting 'in the course of business' by approaching a company about making an investment in its shares. However, it is possible that an individual who regularly seeks to invest in companies who are seeking to raise venture capital with a view to becoming a director and influencing their affairs may be regarded as acting in the course of business. In approaching companies, such as a person should be able to make use of the exemptions for one-off financial promotions in articles 28 and 28A of the Financial Promotion Order (see AUTH App 1.14.3 G).

01/06/2002

AUTH App 1.5.5

Persons who carry on a business which is not a regulated activity will need to be particularly careful in making communications which may amount to financial promotions (because they seek to persuade or incite persons to engage in investment activity (see AUTH App 1.4)). For example, where a company makes financial promotions to its employees, they may well be made in the course of business. Examples of these include financial promotions concerning employee share schemes, group wide insurance arrangements and stakeholder pension schemes. These would need to be approved by an authorised person unless an appropriate exemption is available. AUTH App 1.4.34 G provides further guidance on this.

01/06/2002

AUTH App 1.6

Communicate

01/12/2004

AUTH App 1.6.1

The word 'communicate' is extended under section 21(13) of the Act and includes causing a communication to be made. This means that a person who causes the communication of a financial promotion by another person is also subject to the restriction in section 21. Article 6(d) of the Financial Promotion Order also states that the word 'communicate' has the same meaning when used in exemptions in the Order. Article 6(a) also states that the word 'communication' has the same meaning as 'financial promotion'. It appears to the FSA that a person is communicating where he gives material to the recipient or where, in certain circumstances (see AUTH App 1.6.5 G), he is responsible for transmitting the material on behalf of another person. As both causers and communicators communicate under section 21 the distinction between them is not usually of great significance. What is important is whether a person who is not himself communicating is or is not causing a communication to be made by another. In the FSA's view, primary responsibility for a communication to which section 21 applies and which is capable of being read will rest with its originator. This is the person responsible for its overall contents. Where it is an oral communication primary responsibility will rest with the speaker. A speaker will, of course, be an individual. But where the individual speaks on behalf of his employer, it will be the employer who is responsible. The same will apply if the individual is an officer of a company or partner in a partnership and speaks on behalf of the company or partnership. Individuals who make financial promotions otherwise than in their capacity as employees, officers or partners will need to consider their own position (they may not be acting in the course of business (see AUTH App 1.5)). Where a person other than the originator (for example a newspaper publisher) transmits a communication on the originator's behalf he is communicating it and the originator is causing its communication.

01/06/2002

Persons who communicate or cause a communication

AUTH App 1.6.2

Apart from the originators of a financial promotion, the FSA considers the following persons to be communicating it or causing it to be communicated:

(1) publishers and broadcasters who carry advertisements (including websites carrying banner advertisements); and

(2) intermediaries who redistribute another person's communication probably with their own communications.

01/06/2002

Persons who do not communicate or cause a communication

AUTH App 1.6.3

In the FSA's view, the following persons will not be causing or communicating:

(1) advertising agencies and others when they are designing advertising material for originators;

(2) persons who print or produce material for others to use as advertisements;

(3) professional advisers when they are preparing material for clients or advising them on the need to communicate or the merits or consequences of their communicating a financial promotion; and

(4) persons who are responsible for securing the placing of an advertisement provided they are not responsible for its contents.

01/06/2002

Need for an active step to communicate or cause a communication

AUTH App 1.6.4

The FSA considers that, to communicate, a person must take some active step to make the communication. This will be a question of fact in each case. But a person who knowingly leaves copies of a document where it is reasonable to presume that persons will pick up copies and may seek to act on them will be communicating them.

01/06/2002

AUTH App 1.6.5

The Financial Promotion Order contains an exemption for mere conduits in article 18. It does not follow that all persons who provide services for facilitating the distribution of financial promotions are communicating. Where persons of this kind would normally be unaware of the fact that they may be distributing financial promotions or are indifferent as to whether they are doing so, or both, they will not be regarded as communicating them. This may, for example, include:

(1) postal services providers;

(2) telecommunication services providers;

(3) broadcasting services providers;

(4) courier services providers;

(5) persons employed to hand out or disseminate communications.

(6) a newsagent who sells newspapers and journals containing financial promotions.

In other cases, persons of this kind may need to rely on the mere conduit exemption (see AUTH App 1.12.18 G).

01/06/2002

Website operators

AUTH App 1.6.6

Where a website operator provides links to other sites he is not usually to be regarded as causing the communication of the contents of those other sites to persons who may use the links. See further guidance on Internet issues in AUTH App 1.22.

01/06/2002

Application of exemptions to persons causing a communication

AUTH App 1.6.7

A general point arises about causing and communicating on whether a particular exemption includes a person who is causing a communication to be made by another person. For example, article 43 of the Financial Promotion Order (Members and creditors of certain bodies corporate) applies only to a communication by a body corporate to its own shareholders or creditors about its own securities. This exemption may apply where a company ('P') wishes to acquire another company ('C') for cash and arranges for C to communicate its offer to C's shareholders. In this case, where P causes C to communicate, it is the FSA's view that the exemption that applies to C will also apply to P. This is because, as 'communicate' includes 'causing to communicate', the exemption applies where P causes the communication of the financial promotion by C.

01/06/2002

Application of exemptions to persons who communicate on behalf of others

AUTH App 1.6.8

Another general point arises about the scope of exemptions that apply only to financial promotions by a particular person. This is whether the exemption applies to the communication of a financial promotion by an unauthorised person on behalf of the person to whom the exemption applies. In the FSA's view, this will not be the case unless the exemption specifically states that it applies to a communication made on behalf of the person identified in the exemption. For example, article 62 (Sale of body corporate) applies to 'any communication by or on behalf of a body corporate'.

01/06/2002

Meaning of 'made to', 'directed at' and 'recipient'

AUTH App 1.6.9

Section 21(1) of the Act refers only to the communication of an invitation or inducement. It says nothing about communications being 'made to' or 'directed at' persons or about who the 'recipient' of a communication will be. These facts are determined by the following sequence:

(1) section 21(13) of the Act indicates that communications are 'made';

(2) article 6 of the Financial Promotion Order (Interpretation: communications) indicates that communications are made by being 'addressed to' a person;

(3) article 6 then indicates that communications may be addressed:

(a) to a particular person or persons whether verbally or in a legible form (for example, in a telephone call or letter) - these are referred to as communications which are 'made to' persons; or

(b) to persons generally (for example, in a television broadcast or on a website) - these are referred to as communications which are 'directed at' persons;

(4) article 6 also indicates that a recipient of a communication is the person to whom the communication is made, or, in the case of a non-real time communication directed at persons generally, anyone who reads or hears the communication.

01/06/2002

AUTH App 1.6.10

In the FSA's opinion, the matters in AUTH App 1.6.9 G have the following effects.

(1) Any one particular communication will either be real time or non-real time but not both. This is because:

(a) a real time communication is one made in the course of an interactive dialogue (see AUTH App 1.10.2 G for guidance on the meaning of real time);

(b) those exemptions which concern real time communications apply only to communications which are made to persons and not those which are directed at persons;

(d) the persons to whom a real time communication is addressed are those persons who take part in the interactive dialogue; and

(e) where a communication is addressed to a particular person or persons it is not made to anyone else who may read or hear it.

This means that a real time communication cannot also be a non-real time communication made to persons other than those to whom it is addressed. But it is possible for the same communication to be issued in different forms. For example, the text of a real time financial promotion may be made available to persons generally in writing intending to persuade or incite them to engage in investment activity. In that case, the written version will be a separate non-real time financial promotion which will need to be approved or exempt. A similar situation may arise where a real time financial promotion made during a meeting is recorded on video and then made available to the public. Also, a person may, in the course of an interactive dialogue with a particular person, address an invitation or inducement to others who may be present. Where this does not result in an interactive dialogue taking place with those other persons, the invitation or inducement will be a separate non-real time communication.

(2) A communication in the form of a letter or e-mail addressed to a particular person is not made to anyone else who, legitimately or otherwise, may read it. For example, it will not be made to any persons to whom it is copied unless any invitation or inducement that may be in it is addressed also to those persons.

(3) A communication in the form of a personal conversation or telephone call will not be communicated to anyone else who may eavesdrop or otherwise listen to the conversation.

(4) The recipient of a communication to whom it is addressed, will not always be the person who physically receives it. As a communication under section 21 is an invitation or inducement to engage in investment activity, it will be addressed to the person or persons (P) who is or are being invited or induced. An invitation or inducement may be communicated to someone such as a friend or relative of P who is asked to pass it on. If so, the communication will be regarded as addressed to P and not to the friend or relative. The same will usually apply where an invitation or inducement is communicated to P's adviser or other agent. However, this will not always be the case. The communication made to the agent may be aimed at getting him to act in a particular way. For example, to exercise discretion on his client's behalf. In this case, the communication may be an invitation or inducement to the agent himself to engage in investment activity, In the FSA's view, the friend, relative or agent should not himself be regarded as communicating the invitation or inducement simply because he faithfully relays the message to P. This is provided that the friend, relative or adviser, in relaying the message, does not make his own invitation or inducement. Friends and relatives would not, in any case, be communicating in the course of business. Should agents be making their own financial promotions in relaying messages, it is likely that the exemptions for one-off financial promotions in articles 28 and 28A of the Financial Promotion Order will apply.

(5) It is important to consider whether any particular financial promotion is 'made to' or 'directed at' persons as some exemptions in the Financial Promotion Order apply only to financial promotions which are made to persons.

01/06/2002

AUTH App 1.7

Engage in investment activity

01/12/2004

AUTH App 1.7.1

A communication must be an invitation or inducement to engage in investment activity for the restriction in section 21 to apply. Section 21(8) defines this phrase as:

(1) entering or offering to enter into an agreement the making or performance of which by either party is a controlled activity; or

(2) exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.

01/06/2002

AUTH App 1.7.2

Controlled activity and controlled investment are defined in Schedule 1 to the Financial Promotion Order and are listed in AUTH App 1.36.4 G and AUTH App 1.36.5 G. Broadly speaking, controlled activities and controlled investments are similar to regulated activities and specified investments under the Regulated Activities Order. However, with controlled activities, the exclusions set out in the Regulated Activities Order do not, in most cases, apply. It is important to note, however, that there are certain differences between controlled activities and regulated activities and between controlled investments and specified investments. This is most notable where the financial promotion is about:

(1) certain credit agreements (see AUTH App 1.17 (Financial promotions concerning agreements for qualifying credit));

(2) funeral plan contracts (see AUTH App 1.16 (Financial promotions concerning funeral plans)); and

(3) contracts of insurance other than life policies (see AUTH App 1.17A (Financial promotions concerning insurance mediation activities)).

So, it is quite possible for a person to be carrying on a business in the United Kingdom for which he does not require authorisation because the business activity either is not connected with financial services or falls within one of the exclusions in the Regulated Activities Order but find that the restriction in section 21 applies to his communications. It should also be noted that e-money is not a controlled investment. This means that the restriction in section 21 does not apply to the communication of an invitation or inducement that concerns e-money. This is unless the communication is a financial promotion for some other reason.

01/10/2002

AUTH App 1.7.3

The overall effect is that a financial promotion must relate in some way to a controlled investment and may be summarised as the communication, in the course of business, of an invitation or inducement to:

(1) acquire, dispose of or underwrite certain investments or exercise rights conferred by such an investment for such purpose or for the purpose of converting it; or

(2) receive or undertake investment services such as dealing in investments as principal or as agent, managing investments, advising on investments or safeguarding and administering investments.

01/06/2002

AUTH App 1.7.4

So a financial promotion will not include an invitation or inducement to:

(1) refrain from doing any of the things in AUTH App 1.7.3 G; or

(2) exercise rights conferred by an investment other than to acquire, dispose of, underwrite or convert an investment.

This means that most invitations or inducements to exercise voting rights will not be financial promotions.

01/06/2002

AUTH App 1.7.5

In the FSA's opinion, section 21 will apply to a communication (made in the course of business) if it contains an invitation or inducement to engage in investment activity which is addressed to a particular person or to persons generally. Where this is the case, it will not matter that the communication may be physically delivered to someone other than the person who is intended to engage in investment activity. AUTH App 1.6.10 G gives more guidance on this.

01/06/2002

AUTH App 1.8

Having an effect in the United Kingdom

01/12/2004

AUTH App 1.8.1

Section 21(3) of the Act states that, in the case of a communication originating outside the United Kingdom, the restriction in section 21(1) applies only if it is capable of having an effect in the United Kingdom. In this respect, it is irrelevant whether the communication has an effect provided it is capable of doing so.

01/06/2002

AUTH App 1.8.2

This appears to give a potentially broad jurisdictional scope to section 21. It seems clear that a communication which originates overseas will be capable of having an effect in the United Kingdom if it is an invitation or inducement to engage in investment activity which is communicated to a person in the United Kingdom. It would seem that communications made in other circumstances may also be capable of having an effect in the United Kingdom. However, the exemption for communications to overseas recipients in article 12 of the Financial Promotion Order (Communications to overseas recipients) (see AUTH App 1.12.2 G) prevents section 21 from applying to communications which are not directed at persons in the United Kingdom.

01/06/2002

AUTH App 1.8.3

Where communications by persons in another EEA State are made to or directed at persons in the United Kingdom account must be taken of the effect of any relevant EU Directives. For example, the E-Commerce Directive will, with limited exceptions, prevent the United Kingdom from imposing restrictions on incoming financial promotions in information society services. The Treasury has given effect to this through changes made in the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (Electronic Commerce Directive) Order 2002 (SI 2002/2157). This is explained more fully in AUTH App 1.12.38 G. Other potentially relevant directives include the Television Without Frontiers Directive (89/552/EEC). This prevents the United Kingdom from restricting the re-transmission in the United Kingdom of television broadcasts from other EEA States. The Financial Promotion Order does not have any specific provisions about the Television Without Frontiers Directive. However, it is not intended to block incoming television programmes from other EEA States. The FSA will take this into account in interpreting the Financial Promotion Order and enforcing the restriction in section 21 of the Act.

01/10/2002

AUTH App 1.9

Circumstances where the restriction in section 21 does not apply

01/12/2004

AUTH App 1.9.1

Section 21(2) of the Act sets out two circumstances in which a financial promotion will not be caught by the restriction in section 21(1). These are where the communicator is an authorised person or where the content of the financial promotion has been approved for the purposes of section 21 by an authorised person. Where approval is concerned it must be specifically for the purposes of enabling the financial promotion to be communicated by unauthorised persons free of the restriction under section 21. For example, if a solicitor who is an authorised person approves a financial promotion for legality generally, that would not suffice unless the solicitor also specifically approves the financial promotion for the purposes of section 21. And it will not be enough that an authorised person has ensured that the financial promotion complies with COB 3 purely so that he can communicate it himself. In the FSA's view an unauthorised person should be able to rely on a statement made by an authorised person on the face of a financial promotion that its approval has been given for the purpose of section 21. Such approval may be stated to be made for limited purposes. For example, as with the approval of a financial promotion for an unregulated collective investment scheme (see AUTH App 1.20). In other cases, the unauthorised person may satisfy himself that it is evident from the facts that approval has been given for the purposes of section 21.

01/06/2002

AUTH App 1.9.2

Where an authorised person makes a financial promotion, he is not subject to the restriction in section 21. So, the communication of the financial promotion by the authorised person will not be a criminal offence under the provisions of section 25 of the Act (Contravention of section 21) and any resulting contract will not be unenforceable under section 30 of the Act (Enforceability of agreement resulting from unlawful communications). However, COB 3 may apply wholly or partially to any such financial promotion.

01/06/2002

AUTH App 1.9.3

An unauthorised person may wish to pass on a financial promotion made to him by an authorised person. In this case, the fact that the financial promotion was made to him by an authorised person will not be enough for the restriction in section 21 not to apply to him. The authorised person must also both have approved its content and have done so for the purpose of section 21 of the Act. If an authorised person wishes to ensure that an unauthorised person can communicate a financial promotion made by the authorised person to third parties, it may approve its own financial promotion for the purposes of section 21 of the Act (see COB 3.12.1 G (3)).

01/06/2002

AUTH App 1.9.4

With approval generally, issues may arise as to what would be subject to the restrictions in section 21 where an invitation or inducement to engage in investment activity is made through a publication, broadcast or website or is accompanied by other material. In any such instances, it is necessary to consider the circumstances in which the financial promotion is made. For example, where a financial promotion takes the form of an advertisement or advice in a newspaper, broadcast or website, the rest of the newspaper, broadcast or website would not ordinarily be part of the financial promotion. There may, of course, be a number of financial promotions in the same publication, broadcast or website. They will be regarded as separate financial promotions unless it is clear that they are part of the same invitation or inducement. AUTH App 1.4.28 G offers guidance about when accompanying material may be part of a financial promotion.

01/06/2002

AUTH App 1.9.5

The restriction in section 21 is also disapplied under section 21(5) where provided for by the Treasury by order. The Treasury made such an order on 2 April 2001 (the Financial Promotion Order). This contains a number of specific exemptions which are referred to in AUTH App 1.12 to AUTH App 1.15 and AUTH App 1.21. The Financial Promotion Order has been amended by:

(1) The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2001 (SI 2001/2633));

(2) The Financial Services and Markets Act 2000 (Miscellaneous Provisions) Order 2001 (SI 2001/3650);

(3) The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment No2) Order 2001 (SI 2001/3800);

(4) The Financial Services and Markets Act 2000 (Financial Promotion and Miscellaneous Amendments) Order 2002 (SI 2002/1310);

(5)
The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (Electronic Commerce Directive) Order 2002 (SI 2002/2157); and

(6) The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2003 (SI 2003/ 1676).

A consolidated version of the Financial Promotion Order is available on the Treasury website www.hm-treasury.gov.uk under Documents/Financial Services/Regulating Financial Services/FSMA/ Secondary legislation ordered by date of laying.

01/10/2002

AUTH App 1.10

Types of financial promotion

01/12/2004

AUTH App 1.10.1

Although the restriction in section 21 addresses all forms of financial promotion, it is necessary to distinguish between particular types of financial promotion as these are treated differently under the Financial Promotion Order. This regime recognises two types of financial promotion. These are real time financial promotion and non-real time financial promotions. Real time financial promotions are then divided into solicited or unsolicited real time financial promotions.

01/06/2002

Real time v non-real time financial promotions

AUTH App 1.10.2

The terms real time financial promotion and non-real time financial promotion are defined in article 7 of the Financial Promotion Order (Interpretation: real time communications). Article 7(1) defines a real time financial promotion as a financial promotion made in the course of a personal visit, telephone conversation or other interactive dialogue. A non-real time financial promotion is one that is not a real time financial promotion. Article 7(5) states that financial promotions made by letter or e-mail or in a publication (defined in article 2 (Interpretation: general) as a newspaper, journal, magazine or other periodical publication, a website, a television or radio programme or a teletext service) are non-real time financial promotions. Articles 7(4) and (5) provide certain indicators that a financial promotion is a non-real time financial promotion. These are that:

(1) the financial promotion is made to or directed at more than one recipient in identical terms (save for details of the recipient's identity);

(2) the financial promotion is made or directed by way of a system which in the normal course is or creates a record of the financial promotion which is available to the recipient to refer to at a later time; and

(3) the financial promotion is made by way of a system which in the normal course does not enable or require the recipient to respond to it immediately.

AUTH App 1.6.9 G explains the meaning of 'made to' and 'directed at'.

01/06/2002

AUTH App 1.10.3

In the FSA's view, the matters identified in AUTH App 1.10.2 G mean that:

(1) for a communication to be real time it must be made in course of an interactive dialogue; but that

(2) if the interactive dialogue takes place by means of the exchange of letters or e-mails or in a publication, the communication will be deemed to be non-real time. In this case, publications include newspapers, journals, magazines or other periodical publications, websites or similar systems for the electronic display of information, television or radio programmes and teletext services.

01/10/2002

AUTH App 1.10.4

The words 'personal visit, telephone conversation or other interactive dialogue' clearly imply that the first two are types of the third. In the FSA's view, it is difficult to envisage circumstances in which a personal visit or telephone conversation would not be interactive. The very fact of a conversation taking place would mean two or more persons were interacting with each other. A telephone call is not the same thing as a conversation. It may be made to, or even by, an intelligent machine which asks questions and responds to answers. That is, in the FSA's view, no more an interactive dialogue than a questionnaire or an electronic decision tree. The FSA cannot see how a scripted call can avoid being an interactive dialogue. The caller presumably has prompts as to what to say depending on the response given or question asked by the recipient of the call. However, the recipient is clearly able to and likely to interact and the degree of interaction cannot be determined in advance.

01/06/2002

AUTH App 1.10.5

In the FSA's view, the fact that scope for interaction is essential if a financial promotion is to be real time leads to the following conclusions.

(1) Most communications made in written or pictorial form will not offer scope for interaction. The most likely exception to this is where persons are expected to respond immediately. This situation may arise, for example, where the equivalent of a telephone conversation is conducted by e-mail. This is the basis of the exemption in article 20A(1)(b)(ii) (see AUTH App 1.12.37 G). However, the only communications in written or pictorial form which can be real time communications are those which are not contained in a letter, e-mail or publication. This results from article 7(3) as explained in AUTH App 1.10.2 G and AUTH App 1.10.3 G (2).

(2) The factors in article 7(5), whilst they are helpful as indicators, do not necessarily have to be satisfied for a communication to be non-real time provided it does not represent an interactive dialogue. For example, in the FSA's view, a broadcast made by megaphone from a moving vehicle or temporary chalk markings on a board are non-real time communications even though there may be no lasting record.

(3) Some oral communications will not involve an interactive dialogue. This is because:

(a) they are recorded or broadcast, so preventing interaction; or

(b) they represent a one-way flow such as a speech, address or presentation.

01/06/2002

AUTH App 1.10.6

An issue arises where a person (P), during the course of a presentation or meeting, invites or is asked to answer questions from the audience. P's response may or may not be a real time communication. For example, the question may not be personal to the questioner and P may respond by addressing the audience in a way that precludes or does not call for any interaction. This will be a non-real time communication. On the other hand, the question may call for P to pursue a conversation with the questioner, in which case the communication will be an interactive dialogue and a real time communication. In this case, the communication will not involve a non-real time communication made to or directed at the rest of the audience as it is addressed and made to the questioner. It may be that P, in the course of an interactive dialogue with a questioner, makes an invitation or inducement that is addressed to the audience as a whole. This will be a separate communication that will be non-real time. Any handout or slide or other visual aids used during the presentation will be non-real time communications.

01/06/2002

AUTH App 1.10.7

In the FSA's view, a communication which may exist in enduring form will be a non-real timecommunication. Examples of this include videos, audio cassettes, bulletin boards, websites and recorded telephone messages. Messages placed on Internet chat-rooms will also be non-real time. Radio or television programmes or teletext services may contain communications that involve an interactive dialogue. For example, a communication made by the broadcaster and addressed to an interviewee studio guest, a member of the audience or a person who speaks to the broadcaster by telephone. These will always be non-real time communications. This is again the effect of article 7(3) as explained in AUTH App 1.10.2 G and AUTH App 1.10.3 G (2). Broadcasters may be able to use the exemption for journalists in article 20 of the Financial Promotion Order (see AUTH App 1.12.23 G). Interviewee studio guests, if they make financial promotions during a broadcast, may be able to use the exemption in article 20A of the Financial Promotion Order (Promotion broadcast by company director etc) (see AUTH App 1.12.32 G).

01/06/2002

Solicited v unsolicited real time financial promotions

AUTH App 1.10.8

Article 8(1) of the Financial Promotion Order (Interpretation: solicited and unsolicited real time communications) states that a real time financial promotion is solicited where it is made in the course of a personal visit, telephone conversation or other interactive dialogue which was initiated by or takes place in response to an express request from the recipient. An express request for these purposes may have been made before section 21 entered into force. An unsolicited real time financial promotion is any real time financial promotion which is not solicited.

01/06/2002

AUTH App 1.10.9

Article 8(3) of the Financial Promotion Order clarifies that a person will not have expressly requested a call, visit or dialogue merely :

(1) because he does not indicate that he does not wish to receive any or any further visits or calls or to engage in any or any further dialogue; or

(2) because he agrees to standard terms that state that such visits, calls or dialogue will take place, unless he has signified clearly that, in addition to agreeing to the terms, he is willing for the visit, call or dialogue to take place.

01/06/2002

AUTH App 1.10.10

Article 8(3) of the Financial Promotion Order also has the effect in broad terms that financial promotions made during a visit, call or dialogue will be solicited only if they relate to controlled activities or controlled investments of the kind to which the recipient envisaged that they would relate. In determining whether this is the case, account must be taken of all the circumstances when the call, visit or dialogue was requested or initiated. For example, a person may ask for a visit from a representative of an investment product company with a view to receiving advice on an appropriate pension product. In this case, the representative would be likely to be making an unsolicited real time financial promotion if, during conversation,he attempts to persuade or incite the recipient to make an investment which would not be for the purposes of pension provision.

01/06/2002

AUTH App 1.10.11

AUTH App 1.6.9 G explains that article 6 of the Financial Promotion Order has the broad effect that a communication is made to another person where it is addressed to a particular person or persons. It also states that a 'recipient' of a communication is the person or persons to who it is made (that is to whom it is addressed). This takes on importance where certain exemptions which apply to real time financial promotions made to a person are concerned. It appears to the FSA that, in certain situations, a person may make a financial promotion to someone who has expressly asked that it be made or who has initiated it but where, at the same time, it is also made (that is addressed) to persons who may have not requested or initiated it. For example, a married couple may visit their financial adviser. One partner may request or initiate the dialogue which the adviser then addresses to both. Article 8(4) of the Financial Promotion Order recognises this and has the effect that an unsolicited real time financial promotion will have been made to the persons other than the person who expressly asked for or initiated the call, visit or dialogue in which it was made unless they are:

(1) close relatives of that person (that is, a person's spouse, children and step-children, parents and step-parents and brothers and sisters and step-brothers and step-sisters, including a spouse of any of those persons); or

(2) expected to engage in any investment activity jointly with that person.

01/06/2002

AUTH App 1.10.12

In the FSA's view, persons who may be engaging in investment activity jointly include:

(1) a married couple;

(2) two or more persons, who will invest jointly in a product (for example, a cohabiting couple who are not married or members of a family);

(3) the directors of a company or partners in a firm;

(4) members of a group of companies;

(5) the participants in a joint commercial enterprise;

(6) the members of an investment club; and

(7) the managers or prospective managers of a company who are involved in a management buy-out or buy-in.

01/06/2002

AUTH App 1.10.13

There will be occasions when financial promotions are received by persons other than those in AUTH App 1.10.11 G (1) or AUTH App 1.10.11 G (2) who will not have solicited them. For example, a more distant relative or friend ('F') who acts as a support to the person who is to engage in investment activity ('P') or P's professional adviser ('A'). As explained in AUTH App 1.6.10 G, in such cases the financial promotion will not be made to F or A unless it is also addressed to them. And it will only be addressed to F or A if the invitation or inducement relates to F or A engaging in investment activity. So a solicited financial promotion made to P will not also be an unsolicited financial promotion made to F or A.

01/06/2002

AUTH App 1.10.14

In the FSA's view, the mere fact of a person accepting an invitation to attend a meeting does not automatically mean that he has initiated any dialogue which may take place during the meeting and which may amount to a financial promotion. This will depend on the facts of each case and such matters as the manner in which the invitations are made, the arrangements for acceptance and how the meeting is conducted. For example, the fact that investments or investment services will be offered during the meeting may be made clear in the invitation.

01/06/2002

AUTH App 1.11

Types of exemption under the Financial Promotion Order

01/12/2004

AUTH App 1.11.1

The various exemptions in the Financial Promotion Order are split into three categories:

(1) exemptions applicable to all controlled activities (Part IV of the Order);

(2) exemptions applicable only to controlled activities concerning deposits and contracts of insurance other than life policies (Part V of the Order); and

(3) exemptions applicable to any other types of controlled activity (Part VI of the Order).

01/06/2002

AUTH App 1.11.2

Each individual exemption indicates the type of financial promotion (for example, non-real time) to which it relates. AUTH App 1.36.7 contains a table showing this breakdown. Each exemption also indicates whether it applies to any communication or only to those made to or directed at persons.

01/06/2002

AUTH App 1.11.3

Article 11 of the Financial Promotion Order (Combination of different exemptions) allows for certain exemptions to be combined when no single exemption may apply. The combinations allowed are:

(1) exemptions in Part IV of the Financial Promotion Order (all controlled activities) may be combined with each other or any of the exemptions in:

(a) Part V (deposits and contracts of insurance other than life policies); or

(b) Part VI (other controlled activities);

(2) exemptions in Part V may be combined with each other; and

(3) exemptions in Part VI may be combined with each other.

However, there is no power to combine exemptions in Part V with exemptions in Part VI.

01/06/2002

AUTH App 1.11.4

In a few instances, the requirements of a particular exemption may affect the practicality of its being combined with another. These are article 12 (Communications to overseas recipients) and article 52 (Common interest group of a company). Article 12, for example, requires that financial promotions must be made to or directed only at overseas persons and certain persons in the United Kingdom. This presents no difficulty with article 12 being combined with other exemptions in Parts IV or VI of the Financial Promotion Order where financial promotions are being made to persons. But, where a financial promotion is directed at the persons mentioned in article 12, it is difficult to see how the requirement that it must be directed only at those persons can be satisfied if it is also directed at other persons under another exemption. However, in the FSA's view, this does not prevent the same financial promotion being communicated under another exemption in another form or at any other time. For example, an electronic version of a financial promotion may be directed at overseas persons from a person's website in the United Kingdom using article 12. That person may then use another exemption to send paper copies of the same financial promotion.

01/06/2002

AUTH App 1.11.5

A number of exemptions require that a financial promotion must be accompanied by certain indications. Article 9 of the Financial Promotion Order states that indications must be presented in a way that can be easily understood and in such manner as is 'best calculated' to bring the matter to the recipient's attention. In the FSA's opinion, the expression 'best calculated' should be construed in a sensible manner. It does not, for instance, demand that the indication be presented in bold red capitals at the start of a document or advertisement. If the indication is given enough prominence, taking account of the medium through which it is communicated, to ensure that the recipient will be aware of it and able to consider it before deciding whether to engage ininvestment activity, the FSA would regard article 9 as being satisfied.

01/06/2002

AUTH App 1.11.6

Some exemptions are based on the communicator believing on reasonable grounds that the recipient meets certain conditions. For example, articles 19(1)(a), 44, 47 and 49. What are reasonable grounds for these purposes will be a matter for the courts to decide. In the FSA's view, it would be reasonable for a communicator to rely on a statement made by a potential recipient that he satisfies relevant conditions. This is provided that there is no reason to doubt the accuracy of the statement. In case of doubt, further checks may be necessary. These could include:

(1) checking on the record kept by the FSA under section 347 of the Act (The record of authorised persons etc) that a person is authorised;

(2) checking with a person's employer that he is employed in a particular capacity; or

(3) in the case of a person claiming to be a certified high net worth individual or sophisticated investor, asking to see a copy of the current certificate or the signed statement or both.

01/06/2002

AUTH App 1.12

Exemptions applying to all controlled activities

01/12/2004

AUTH App 1.12.1

Part IV of the Financial Promotion Order contains several exemptions which apply to all controlled activities. These are summarised in AUTH App 1.12.2 G to AUTH App 1.12.38 G.

01/10/2002

Financial promotions to overseas recipients (article 12)

AUTH App 1.12.2

This exemption concerns financial promotions which are made to or directed only at overseas persons (except in the circumstances referred to in AUTH App 1.12.8 G).

01/06/2002

AUTH App 1.12.3

The exemption applies to situations where a financial promotion is either:

(1) made to a person who receives it outside the United Kingdom; or

(2) directed at persons who are outside the United Kingdom.

01/06/2002

AUTH App 1.12.4

The exemption applies whether or not the financial promotion is made from the United Kingdom. However, there is the exception that, if it is an unsolicited real time financial promotion, it must be made from a place outside the United Kingdom and be for the purposes of a business carried on entirely outside the United Kingdom. To give effect to the principle of country of origin regulation of information society services as required by the E-Commerce Directive, article 12(7) of the Financial Promotion Order prevents the exemption applying to an outgoing electronic commerce communication.

01/10/2002

AUTH App 1.12.5

Articles 12(3) and (4) of the Financial Promotion Order (subject to article 12(5) - see AUTH App 1.12.8 G) have the effect that, where a financial promotion is directed from a place outside the United Kingdom, it will be conclusive proof that it is not directed at persons in the United Kingdom even if it is received by a person in the United Kingdom, if:

(1) the financial promotion is not referred to in or directly accessible from another communication (for example, an advertisement in a UK newspaper or a UK website) which is itself made to or directed at persons in the United Kingdom by or on behalf of the same overseas person; and

(2) there are proper systems and procedures in place to prevent recipients in the United Kingdom other than persons to whom the communication might otherwise lawfully have been made from engaging in the investment activity to which the financial promotion relates with the overseas person or his close relative or group company.

01/06/2002

AUTH App 1.12.6

There is no definition in the Financial Promotion Order of what 'proper systems and procedures' are, and the matter will ultimately be for the courts to determine. This is unsurprising as systems and procedures may take many different forms depending upon the precise circumstances in which financial promotions are made. But it is clear that persons seeking conclusive proof that the exemption applies must consciously make arrangements to prevent their dealing with certain recipients in the United Kingdom. In the FSA's view, proper systems and procedures will involve arrangements for scrutinising enquirers or applications with a view to identifying persons who are located in the United Kingdom and are not persons to whom the communication could lawfully have been made. Persons to whom the financial promotion could lawfully have been made does not mean only those covered by article 12. For example, depending on the controlled investment which the financial promotion is about, they could include a certified high net worth individual or a sophisticated investor. Such arrangements may be conducted manually using a questionnaire or electronically through password-protected access to information or the programming of software to recognise and reject United Kingdom addresses or both. The need for proper systems and procedures does not automatically mean that there will no longer be conclusive proof should, on isolated occasions, the systems or procedures fail to prevent dealings with a recipient in the United Kingdom. Provided the systems and procedures were and remain proper there will be conclusive proof that the exemption applies. A financial promotion from overseas might lead to a recipient in the United Kingdom engaging in investment activity with another group company (G) of the person (P) who makes the financial promotion. In this situation, it is not necessary that P operates the proper systems and procedures to get conclusive proof that the exemption applies. It will be enough that G operates the proper systems and procedures.

01/06/2002

AUTH App 1.12.7

Where a financial promotion is directed from within the United Kingdom, articles 12(3) and (4) also state (subject to article 12(5) - see AUTH App 1.12.8 G) that there can be conclusive proof that the financial promotion is directed only at persons outside the United Kingdom. This will be the case if, in addition to the conditions referred to in AUTH App 1.12.5 G (1) and AUTH App 1.12.5 G (2) the financial promotion is accompanied by an indication that :

(1) it is directed only at persons outside the United Kingdom; and

(2) it must not be acted upon by persons in the United Kingdom.

01/06/2002

AUTH App 1.12.8

In any case, some but not all of the conditions referred to in AUTH App 1.12.5 G (1) to AUTH App 1.12.5 G (2) and AUTH App 1.12.7 G (1) to AUTH App 1.12.7 G (2) (or the additional condition that the communication is included in a website, newspaper or periodical publication which is principally accessed in or intended for a non-UK market or in a radio or television broadcast or teletext service transmitted principally for reception overseas) may be met. In these cases, those conditions being satisfied will be taken into account in assessing whether the financial promotion is directed only at persons outside the United Kingdom. Even if none of the conditions are satisfied, it is still possible that a financial promotion which has been received by a person in the United Kingdom may properly be regarded as not having been directed at him. In the FSA's view, it will be an indication that a financial promotion in a website is directed at the United Kingdom if the website is registered with a UK search engine. Article 12(5) of the Financial Promotion Order also states that a financial promotion may be regarded as directed only at persons outside the United Kingdom where it is also directed at persons in the United Kingdom. This is provided those persons are limited to:

(1) investment professionals (article 19); or

(2) high net worth companies etc (article 49), or both.

Where a financial promotion is also directed at such persons in the United Kingdom the conclusive conditions referred to in AUTH App 1.12.5 G (1) to AUTH App 1.12.5 G (2) andAUTH App 1.12.7 G (1) to AUTH App 1.12.7 G (2) should be read as if references to persons to whom the financial promotion may be made or directed included investment professionals or high net worth companies etc. AUTH App 1.11.4 G explains how article 12 may be combined with other exemptions.

01/06/2002

Financial promotions from customers and potential customers (article 13)

AUTH App 1.12.9

Financial promotions made by a prospective customer to a person who supplies a controlled investment or services comprising controlled activities with a view to his acquiring the investment, or receiving the services or receiving information about those investments or services, are exempted. This exemption will only be of relevance to corporate customers or others who are acting in the course of business. Other types of customers will not be subject to section 21 to begin with.

01/06/2002

Follow up financial promotions (article 14)

AUTH App 1.12.10

Financial promotions other than unsolicited real time financial promotions are exempt where they follow up an earlier financial promotion which, in compliance with another exemption (such as that for promotions made to high net worth individuals or sophisticated investors - see AUTH App 1.14.21 G and AUTH App 1.14.27 G), contains certain indications or information. This is provided the financial promotion:

(1) is made by the person who made or directed the earlier financial promotion;

(2) is made to a recipient of the earlier financial promotion;

(3) relates to the same matter as the earlier financial promotion; and

(4) is made within 12 months of the earlier financial promotion.

This exemption does not help in situations where the original financial promotion was made or directed under an exemption which did not require it to include any indications or information. However, it is likely that, in many cases where no indications or information are required, the exemption to which the earlier financial promotion applies would also apply to any follow up financial promotion. The requirement that the follow up financial promotion be made by the person who made or directed the earlier one would seem to prevent use of the exemption by someone acting on behalf of that person. However, the earlier financial promotion may have been made or directed by an individual in his capacity as an officer or employee of a company or a partner or employee of a partnership. If so, the exemption will be satisfied if the follow-up financial promotion is made by another employee, director or partner of the same company or partnership.

01/06/2002

Introductions (article 15)

AUTH App 1.12.11

This exemption applies only to a real time financial promotion that is made with a view to or for the purposes of introducing the recipient to certain kinds of person. These are authorised persons who carry on the controlled activity to which the financial promotion relates, or exempt persons where the financial promotion relates to a controlled activity that is also a regulated activity in relation to which he is an exempt person. This is subject to the requirement that:

(1) the person making the financial promotion ('P') is not a close relative or group company of the authorised or exempt person;

(2) P does not receive any financial reward for making the introduction other than from the recipient of the financial promotion; and

(3) the recipient of the financial promotion has not, in his capacity as investor, sought advice from P or, if he has, P has declined to provide it and has recommended that he seek advice from an authorised person.

For the purposes of (2), it is the FSA's view that P may be viewed as not receiving any financial reward other than from the recipient where P treats any commission or other financial benefit received from third parties to whom introductions are made as belonging to and held to the order of the recipient. P cannot simply tell the recipient that P will receive commission. The position must be that the commission belongs to the recipient and must be paid to him unless he agrees to its being kept by P. Where this occurs, the payment may be seen to be received by P from the recipient. In the FSA's opinion, the condition would be satisfied by P paying over to the recipient any third party payment he receives. Otherwise, it would be satisfied by Pinforming the recipient of the sum and that he has the right to require that the sum to be paid to him. This would allow the sum to be used to offset fees due from the recipient for other services provided to him by P. This could take the form of an agreement between P and the recipient that sums received by P will be used to offset any other fees due to P from the recipient. This is provided that P informs the recipient of sums which P has received and of the fees which they have been used to offset. However, it does not allow P to keep third party payments by seeking the recipient's agreement through standard terms and conditions. Similarly, a mere notification to the recipient that a particular sum has been received coupled with a request to keep it does not satisfy the condition.

01/10/2002

Exempt persons (article 16)

AUTH App 1.12.12

This exemption covers two distinct situations. Article 16(1) applies to all exempt persons where they make financial promotions for the purpose of their exempt activities. These persons would include appointed representatives, recognised investment exchanges, recognised clearing houses and those who are able to take advantage of the Exemption Order. So, it allows exempt persons both to promote that they have expertise in certain controlled activities and to make financial promotions in the course of carrying them on. Article 16(1) does not apply to unsolicited real time financial promotions. Persons to whom the general prohibition does not apply because of Part XX (Provision of financial services by members of the professions) or Part XIX (Lloyd's members and former underwriting members) of the Act are not, for the purposes of article 16, exempt persons for their Part XX or Part XIX activities.

01/06/2002

AUTH App 1.12.13

Article 16 (2) applies to unsolicited real time financial promotion made by an appointed representative in carrying on the business:

(1) for which his principal has accepted responsibility for the purposes of section 39 of the Act (Exemption of appointed representatives); and

(2) in relation to which the appointed representative is exempt under section 39.

In addition, the financial promotion may only be made in the circumstances in which it could be made by the appointed representative's principal under COB 3. This ensures a level playing field as between employed and tied sales forces. This exemption may be of particular use to telephone sales agencies who will often need to be appointed representatives of investment product companies.

01/06/2002

Generic promotions (article 17)

AUTH App 1.12.14

Under this exemption, the financial promotion itself must not relate to a controlled investment provided by a person who is identified in it, nor must it identify any person as someone who carries on any controlled activity. So, it will apply where there is a financial promotion of a class of products. For example 'ISAs are great' or 'buy into an investment trust and help the economy'. Such financial promotions may be made by a person such as a trade association which is not itself carrying on a controlled activity. But this is provided there is no mention of any particular ISA or investment trust or of any person who may give advice on or arrange, sell or manage such investments.

01/06/2002

AUTH App 1.12.15

The exemption can also be used in certain circumstances where an intermediary is advertising its services as an intermediary. This is because advising on and arranging deposits and contracts of insurance other than life policies are not controlled activities. This means that an unauthorised intermediary offering to find the best rates on deposits may identify himself in the financial promotion as he will not be carrying on a controlled activity. This is provided that the financial promotion does not identify any particular deposit-taker. The same considerations would apply to an authorised intermediary who offers to advise on the best available motor insurance.

01/06/2002

AUTH App 1.12.16

Other persons may be able to take advantage of the exemption. For example, a person making a generic financial promotion may identify himself, whether he may carry on a controlled activity or not. This is provided that the financial promotion does not (directly or indirectly) identify him as someone who carries on a controlled activity.

01/06/2002

AUTH App 1.12.17

Journalists may be able to take advantage of this exemption when writing about investments generally. But the exemption would not apply if the financial promotion recommends the purchase or sale of particular investments such as XYZ Plc shares. This is because it will be identifying XYZ Plc as a person who provides the controlled investment (being its shares) and as a person who carries on the controlled activity of dealing in securities and contractually based investments (by issuing its own shares). Nor would the exemption apply if the financial promotion identifies an exchange on which investments are traded. That would indirectly identify the exchange as a person who carries on the controlled activities of dealing in securities or contractually based investments or arranging deals in investments. Journalists may also be able to use the exemption for journalists in article 20 (See AUTH App 1.12.23 G).

01/06/2002

Mere conduits (article 18 and 18A)

AUTH App 1.12.18

The purpose of this exemption is to ensure that, subject to certain conditions, the restriction in section 21 of the Act does not apply to those who merely transport the financial promotions of other persons. Obvious examples here are postal and Internet service providers, courier companies and telecommunications companies. AUTH App 1.6.5 G explains that such persons may not be regarded as communicating a financial promotion simply because they have distributed it. Article 18 (Mere conduits) does not apply where the financial promotion is an outgoing electronic commerce communication. A person acting as a mere conduit for financial promotions of this kind will, however, be able to use article 18A (Outgoing electronic commerce communications: mere conduits, caching and hosting). Article 18A is not subject to the conditions that apply to other forms of mere conduit (as referred to in AUTH App 1.12.19 G and AUTH App 1.12.20 G). However, it does require compliance with the conditions in articles 12(1), 13(1) and 14(1) of the E-Commerce Directive that relate to the liability of intermediary service providers.

01/10/2002

AUTH App 1.12.19

The conditions in article 18(2) include a requirement that the person making the financial promotion does not select, modify or otherwise exercise control over its content before it is transmitted or received. Article 18(3) provides that a person is not selecting, modifying or exercising control merely as a result of having power to remove material which is illegal, defamatory or in breach of copyright or at the request of a regulatory body or where the law requires him to do so. However, in the FSA's view, the control normally exercised by newspaper publishers or broadcasters over traditional forms of advertising they carry is likely to be enough for the exemption not to be available to such persons.

01/06/2002

AUTH App 1.12.20

The conditions in article 18 also require that the person acting as the mere conduit must communicate in the course of a business carried on by him the principal purpose of which is transmitting or receiving material provided to him by others. In the FSA's view, what matters is that the person is carrying on a business which has the required principal purpose. Such a business might represent but a part of a person's activities (however small), so long as it represents a discrete business. A discrete business is an activity whose principal purpose is to receive and transmit other persons' communications and which is not simply a service provided incidentally or as an adjunct to another service. For example a person who operates a website will not be entitled to the exemption (should he be communicating financial promotions see AUTH App 1.6) simply because he chooses to provide a chatroom or bulletin board for the use of his customers.

01/06/2002

Investment professionals (article 19)

AUTH App 1.12.21

Financial promotions made only to or directed only at certain types of person who are sophisticated enough to understand the risks involved are exempt. These are:

(1) authorised persons;

(2) exempt persons (where the financial promotion relates to a controlled activity which is a regulated activity for which the person is exempt);

(3) governments and local authorities; and

(4) persons whose ordinary business involves carrying on a controlled activity of the kind to which the financial promotion relates and which may include:

(a) investment trust companies;

(b) companies which provide venture capital;

(d) other persons who carry on an activity such as dealing in, arranging or advising on investments but who do not require authorisation because of an exclusion in the Regulated Activities Order; and

(e) professional firms who are exempt under Part XX of the Act.

This also includes persons acting in their capacity as directors, officers or employees of such persons.

01/06/2002

AUTH App 1.12.22

Article 19(4) sets out conditions which, if all are satisfied, offer conclusive proof that a financial promotion is directed only at investment professionals. These conditions relate to indications accompanying the financial promotion and the existence of proper systems and procedures. The guidance about proper systems and procedures in AUTH App 1.12.6 G applies equally to article 19. Article 19(6) specifically states that a financial promotion may be treated as made only to or directed only at investment professionals even is it is also made to or directed at other persons to who it may lawfully be communicated. This would include overseas persons and high net worth companies, etc. Where this is the case, the conditions in article 19(4) should, in the FSA's view, be satisfied if:

(1) the indications make it clear that the financial promotion is directed only at investment professionals and other persons to whom it may lawfully be promoted; and

(2) the systems and procedures are designed to prevent persons other than such types of persons engaging in investment activity.

01/06/2002

Journalists (article 20)

AUTH App 1.12.23

The broad scope of the restriction in section 21 of the Act will inevitably mean that it will, from time to time, apply to journalists and others who make their living from commenting on news including financial affairs (such as broadcasters). This is liable to happen when such persons offer share tips or recommend the use of a particular firm for investment purposes. Such tips or recommendations are likely to amount to inducements to engage in investment activity.

01/06/2002

AUTH App 1.12.24

The Treasury, in making the Financial Promotion Order, noted that financial journalism has an important part to play in increasing consumer awareness of financial services and products. It further observed the need to strike the right balance between protecting consumers and ensuring that the level of regulation is as light as possible, while respecting the principle of the freedom of the press.

01/06/2002

AUTH App 1.12.25

With this objective in mind, the exemption in article 20 (as amended by article 2 of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment No 2) Order 2001) applies to any non-real time financial promotion the contents of which are devised by a person acting as a journalist where the financial promotion is in:

(1) a newspaper, journal, magazine or other periodical publication;

(2) a regularly updated news or information service (such as a website or teletext service); or

(3) a television or radio broadcast or transmission.

In addition, the publication, service or broadcast must be one which satisfies the principal purpose test set out in article 54 of the Regulated Activities Order. This means that the principal purpose must not be to advise on or lead or enable persons to buy or sell securities or relevant investments. See AUTH 7 for further guidance on this. Article 20 does not define what is meant by a person 'acting in the capacity of a journalist'. In the FSA's opinion, this expression has a potentially wide meaning. It will apply to anyone who writes for or contributes to a publication, service or broadcast. This includes experts or analysts who may be asked to contribute articles for a publication or website service or to offer their opinion in a broadcast.

01/06/2002

AUTH App 1.12.26

Provided the conditions in AUTH App 1.12.25 G are met, the exemption in article 20 applies to any non-real time financial promotion. However, there is an additional condition where the subject matter of the financial promotion is shares or options, futures or contracts for differences relating to shares and the financial promotion identifies directly a person who issues or provides such an investment. In such cases, the exemption is subject to a disclosure requirement which is itself subject to certain exceptions (see AUTH App 1.12.27 G). This requirement is that the financial promotion must be accompanied by an indication of the nature of any financial interest held by the person responsible for the promotion (that is, the journalist or editor) or member of his family (his spouse or children under 18). A financial interest would be subject to disclosure where the person or a member of his family would be likely to get a financial benefit or avoid a financial loss if persons acted in line with the financial promotion. Article 20 does not specify the way in which a financial interest should be indicated. In the FSA's view, a financial interest should be disclosed in a way that will enable recipients to understand readily its nature. For example, 'the writer has a substantial holding of traded call options in these shares'.

01/06/2002

AUTH App 1.12.27

The exceptions to the disclosure requirement are where the financial promotion is in either :

(1) a publication, service or broadcast which has proper systems and procedures which prevent the publication of communications without disclosure of financial interests; or

(2) a publication, service or broadcast which falls within the remit of:

(a) the Code of Practice issued by the Press Complaints Commission;

(b) the Programme Code of the Radio Authority;

(d) the Programme Code of the Independent Television Commission.

01/10/2002

AUTH App 1.12.28

The effect of AUTH App 1.12.27 G (2) is that financial promotions made by journalists in publications, services or broadcasts to which one of the codes or the guidelines apply are not subject to the disclosure requirement. This is so even if a financial promotion is made in breach of the codes or guidelines. Such financial promotions would remain to be dealt with by the body responsible for the code or guidelines and the publisher concerned. The code or guidelines may, of course, themselves require disclosure but the fact that they have been specified does not necessarily mean that they will or will always require disclosure. That is something which depends on the requirements of the particular code or guidelines.

01/06/2002

AUTH App 1.12.29

The effect of AUTH App 1.12.27 G (1) is that a journalist will not breach section 21 by not disclosing a financial interest, providing that the publication, service or broadcast concerned operates proper systems and procedures. As with the exemption in article 12 of the Financial Promotion Order (see AUTH App 1.12.6 G), what proper systems and procedures are will be a matter ultimately for the courts to determine and may vary according to the medium used. It will depend upon all the circumstances surrounding the publication, service or broadcast. In the FSA's opinion, proper systems and procedures may achieve the objective of preventing the publication of communications without the required disclosure in one of two ways. They may require that disclosure be made. Or they may seek to prevent journalists from acting in a way which would enable them to profit if persons follow their published recommendations. For example, by banning their dealing in the shares or related investments for a reasonable period following the promotion. This would ensure that the journalist will not have a financial interest to disclose. For example, and in the FSA's opinion, a publication, service or broadcast may be likely to satisfy the test referred to in AUTH App 1.12.27 G (1) if it has set up procedures:

(1) for persons responsible for devising the content of financial promotions, or for deciding that they should be included in the publication, service or broadcast, to register their financial interests in a central log;

(2) for the central log to be properly maintained and regularly reviewed;

(3) where disclosure is required, for all financial promotions to be subject to review before publication or broadcast by an appropriately qualified and senior person; and

(4) for the persons referred to in (1) to be made aware in writing of the procedures and of their obligations to disclose their financial interests or to refrain from any course of action which may be likely to give them a financial interest requiring disclosure and, preferably, to have confirmed their acceptance of those obligations in writing.

01/06/2002

AUTH App 1.12.30

Persons such as experts or analysts may be approached to contribute at very short notice and may be overseas. In such cases, the systems and procedures referred to in AUTH App 1.12.29 G may not be practical. It is the FSA's opinion that, where occasional contributors are concerned, proper systems and procedures may include arrangements for ensuring that the need for disclosure (or the avoidance of financial interests) is drawn to the contributor's attention before the communication is made. The contributor's confirmation that he understands and accepts the position on disclosure would also need to be obtained. The arrangements for bringing the position on disclosure to the contributor's attention and for obtaining his understanding and acceptance should be made in whatever way is most appropriate in the circumstances. In other cases, it may be enough that the persons responsible for the broadcast satisfy themselves that contributors represent reputable regulated businesses. And that it would be reasonable to believe that they would not seek to promote an investment or investment service in which they had a financial interest without disclosing that fact. This is, of course, merely an example and not the only circumstances in which overseas broadcasts may be regarded as having proper systems and procedures.

01/06/2002

AUTH App 1.12.31

It appears to the FSA, however, that there will be situations when it may not be practical for the persons who are responsible for a publication, service or broadcast to apply proper systems and procedures to every person who may, whilst acting in the capacity of a journalist, communicate a financial promotion. For example where persons are asked to stand in at the last moment. In such cases, it is the FSA's opinion that the benefit of the exclusion will not be lost as respects those persons who are subject to the proper systems and procedures. However, any financial promotions communicated by persons who are not subject to them would still be subject to the restriction in section 21 and would need to be approved by an authorised person or otherwise exempt.

01/06/2002

Promotion broadcast by company director etc (article 20A)

AUTH App 1.12.32

Article 20A (which was added by article 3 of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment No 2) Order 2001) provides a further exemption for certain financial promotions communicated by means of a service or broadcast which satisfies the principal purpose test in article 54 of the Regulated Activity Order (see AUTH App 1.12.25 G and AUTH 7). Readers of this section should also refer to the guidance on company statements in AUTH App 1.21.

01/10/2002

AUTH App 1.12.33

The main purpose of the exemption appears to be to guard against the possibility that, during the course of a broadcast interview or a live website presentation, a financial promotion is made inadvertently by a director or employee of a company or other business undertaking when he is not acting in the capacity of a journalist (see AUTH App 1.12.25 G). The exemption applies if the financial promotion relates only to:

(1) shares of the undertaking or of another undertaking in the same group or options, futures or contracts for differences related to those shares; or

(2) any controlled investment issued or provided by an authorised person in the same group as the undertaking.

01/06/2002

AUTH App 1.12.34

The exemption applies where the financial promotion:

(1) comprises words which are spoken by the director or employee and not broadcast, transmitted or displayed in writing; or

(2) is displayed in writing only because it is part of an interactive dialogue to which the director or employee is a party and in the course of which he is expected to respond immediately to questions put by a recipient of the communication.

This is provided that the financial promotion is not part of an organised marketing campaign. AUTH App 1.14.4 G (3) provides guidance on the meaning of an organised marketing campaign. In the context of article 20A, it is the FSA's view that an individual or isolated financial promotion will not represent or be part of an organised marketing campaign. However, a company representative may use a broadcast interview or webcast to encourage or incite viewers or listeners to acquire investments or investment services which are the subject of an advertising campaign being conducted at the same time. In such cases, any financial promotion contained in that interview or webcast will be part of an organised marketing campaign. Where this is the case, the company representative may be able to rely on other exemptions depending upon the subject matter of the financial promotion - see AUTH App 1.21.

01/06/2002

AUTH App 1.12.35

The exemption also requires that the director or employee is identified as such in the financial promotion before it is communicated.

01/06/2002

AUTH App 1.12.36

The first part of the exemption (referred to in AUTH App 1.12.34 G (1)) specifically precludes any form of written communication. However, the FSA understands that the Treasury did not intend to prohibit the use of written words in the form of subtitling. These may be an aid to those with hearing difficulties or to interpret a foreign language, or the use of captions which supplement a spoken communication by highlighting aspects of it without introducing anything new. The FSA cannot fetter its discretion and must consider potential breaches of section 21 of the Act on their merits. However, where the only reason why a person may have breached section 21 of the Act is because he has used subtitling or captioning in this way the FSA would not expect to take further action. In the FSA's view, the position is different if a transcript of the spoken communication is later made available. This would be a separate communication and would need to be approved or otherwise exempt.

01/06/2002

AUTH App 1.12.37

The second part of the exemption (referred to in AUTH App 1.12.34 G (2)) envisages that the director or employee will be holding the equivalent of a conversation conducted in writing. Typically this will involve the exchange of e-mails. It is possible that this part of the exemption could be used by companies making so-called webcasts over the Internet. However, this would only be the case if the service through which the webcast is provided is a regularly updated news or information service (and which meets the principal purpose test - see AUTH App 1.12.25 G). There is no reason why the exemption should not apply to a company website which provides regularly updated news or information about the activities, products or services of the company where the website represents a service provided to those who use it. However, not all company websites will be services of this kind.

01/06/2002

Incoming electronic commerce communications (article 20B)

AUTH App 1.12.38

Article 20B gives effect to the provisions of the E-Commerce Directive by exempting incoming electronic commerce communications. However, article 20B does not apply to the following communications:

(1) an advertisement by the operator of a UCITS of units in that scheme;

(2) an invitation or inducement to enter into a contract of insurance where:

(a) it is made by an undertaking which has received official authorisation in line with article 6 of the First Life Directive or the First Non-life Directive; and

(b) the insurance falls within the scope of any of the Insurance Directives; or

(3) an unsolicited communication made by electronic mail.

For the purposes of (3), a communication is unsolicited unless it is made in response to an express request from its recipient.

01/10/2002

AUTH App 1.13

Exemptions applying to financial promotions concerning deposits and certain contracts of insurance

01/12/2004

AUTH App 1.13.1

The exemptions in Part V of the Financial Promotion Order concern financial promotions relating to deposits and contracts of insurance other than life policies. The exemptions may be combined with exemptions in Part IV but not with those in Part VI.

01/06/2002

AUTH App 1.13.2

Part V provides two kinds of exemption of a general nature and one specific exemption. The exemptions of a general nature are:

(1) any form of real time financial promotion (articles 23 (Deposits: real time communications) and 26 (Relevant insurance activity; real time communications)); and

(2) non-real time financial promotions containing certain specified information including the name, country of incorporation (if relevant) and principal place of business of the deposit-taker or insurer and whether it is regulated, details of any redress schemes and, for deposit-takers only, certain financial information (articles 22 (Deposits: non-real time communications) and 24 (Relevant insurance activity: non-real time communications)).

01/06/2002

AUTH App 1.13.3

Article 25 (Relevant insurance activity: non-real time communications: reinsurance and large risks) exempts financial promotions concerning contracts of insurance which are either contracts of reinsurance or contracts covering certain large risks.

01/06/2002

AUTH App 1.13.4

Intermediaries involved with arranging and advising on deposits may be unauthorised persons as such activities do not amount to regulated activities and so do not require authorisation under section 19 of the Act. However, the combination of the exemptions in Part V together with certain of the exemptions in Part IV (such as generic promotions - see AUTH App 1.12.14 G - and follow up communications - see AUTH App 1.12.10 G) should mean that it will often be possible for such persons to avoid any need to seek approval for their financial promotions from an authorised person. Guidance on the application of these exemptions to financial promotions about insurance mediation activities is in AUTH App 1.17A (Financial promotions concerning insurance mediation activities).

01/06/2002

AUTH App 1.14

Other financial promotions

01/12/2004

AUTH App 1.14.1

The exemptions in Part VI apply to different types of financial promotion, and the exemption available may be based on a number of facts. These may be the identity of the maker of the financial promotion, the identity of the recipient of the financial promotion, the subject matter of the financial promotion or the nature of the financial promotion itself. Some of these exemptions apply to non-real time financial promotions, others to solicited real time financial promotions and others to unsolicited real time financial promotion. Many of the exemptions apply to more than one category of financial promotion. AUTH App 1.36.7 contains a table showing which types of financial promotion are covered by each individual exemption.

01/06/2002

AUTH App 1.14.2

AUTH App 1.14.3 G to AUTH App 1.14.42 G describe some of the more significant exemptions contained in Part VI. See the Financial Promotions Order for full details of all the exemptions in Part VI.

01/06/2002

One-off financial promotions (articles 28 and 28A)

AUTH App 1.14.3

Article 28 exempts financial promotions, other than unsolicited real time financial promotions, which are one-off in nature. Whether or not any particular financial promotion is one-off in nature will depend upon the individual circumstances in which it is made. Article 28(3) sets out conditions which, if all are met, are conclusive. Otherwise they are indicative. Even if none are met the exemption may still apply. This makes it clear that the overriding issue is whether the financial promotion is, in fact, a one-off. The conditions are that:

(1) the financial promotion is made only to one recipient or to a group of recipients in the expectation that they would engage in investment activity jointly;

(2) the product or service involved has been determined having regard to the circumstances of the recipient or recipients; and

(3) the financial promotion is not part of an organised marketing campaign.

01/06/2002

AUTH App 1.14.4

The FSA considers the effect of each of the conditions in AUTH App 1.14.3 G (1) to AUTH App 1.14.3 G (3) to be as follows.

(1) The first condition requires the financial promotion to be made, so ruling out any financial promotions which are directed at persons. The effect of article 6(b) and (e) of the Financial Promotion Order is that a communication is made to a person when it is addressed to him and that person to whom the financial promotion is addressed is its recipient. This means that when one person addresses a financial promotion to another person, it will not be regarded as having been made to anyone else. So, in the case of a real time financial promotion, it is not made to any other person who may be present. And in the case of a non-real time financial promotion, it is not made to any other person who may read or hear it. If the financial promotion is addressed to more than one person they must be proposing to engage in investment activity jointly (see AUTH App 1.14.6 G).

(2) The second condition requires the financial promotion to apply to the personal circumstances of the recipient so not benefiting a financial promotion which take no account of the personal circumstances of the recipient or recipients.

(3) The third condition requires that the financial promotion must not be part of an organised marketing campaign. There is no definition of an organised marketing campaign but, in the FSA's view, it is appropriate to consider each of the words and their effect in this context:

(a) 'organised' suggests that the campaign is planned in advance and not something done on the spur of the moment;

(b) 'marketing' suggests an element of public promotion so as not to apply to anything of a personal or very limited nature even if it is promotional; and

01/06/2002

AUTH App 1.14.5

In the FSA's opinion, the indicators referred to in AUTH App 1.14.4 G suggest that there are two essential elements of a one-off financial promotion. These are that it is tailored to the circumstances of the recipient and that it is individual in nature (in that it is not simply a personalised letter sent out as part of a general mailshot). Apart from this there is no need for the communication to be an isolated instance. For example, the fact that there may be a considerable number of communications made during negotiations for a transaction will not prevent each communication from being one-off. The FSA is of the view that none of the three conditions carries significantly more weight than the others. Each financial promotion must be assessed against the conditions on its merits. The FSA regards the following to be financial promotions which will meet the conclusive conditions provided, in each case, that the financial promotion is tailored to the personal circumstances of and addressed to the recipient.

(1) Individual personal written communications or one to one conversations.

(2) A response printed in a publication or website or given during a broadcast in response to an enquiry from a reader, viewer or listener.

(3) A response given to a person who asks a question at a presentation or meeting.

(4) A response to a question raised by another person using an internet chatroom or bulletin board.

01/06/2002

AUTH App 1.14.6

In the FSA's view, a group of recipients who may be engaging in investment activity jointly could include:

(1) a married couple;

(2) two or more persons who will invest jointly in a product (for example, a cohabiting couple who are not married or members of a family);

(3) the directors of a company or partners in a firm;

(4) members of a group of companies;

(5) the participants in a joint commercial enterprise;

(6) the members of an investment club; and

(7) the managers or prospective managers of a company who are involved in a management buy-out or buy-in.

01/06/2002

AUTH App 1.14.7

A financial promotion may fail to satisfy all of the indicators referred to in AUTH App 1.14.4 G because it is addressed to more than one recipient and they are not persons who will engage in investment activity jointly. In the FSA's view, such a financial promotion is capable of being one-off where the persons are to enter into the same transaction and the promotion is tailored to their individual circumstances. This may typically happen during negotiations for the sale of a company or the raising of corporate finance where a small number of parties are involved.

01/06/2002

AUTH App 1.14.8

The fact that a financial promotion may be made following an organised marketing campaign does not mean that it must automatically be regarded as part of the campaign or that it cannot be one-off. For example, after a person has responded to a general promotion, an investment manager may make financial promotions to him and tailor them to his individual objectives. Such subsequent financial promotions can be one-off. Similarly, a person who provides corporate finance services may use an organised marketing campaign to find a potential investor or investee company. Any subsequent financial promotions made during negotiations for the deal may be one-off even though they may represent a series of communications to the same recipient. On the other hand, the situation is slightly different where an organised marketing campaign involves the sale of an investment product such as a life policy. There will be fewer instances where subsequent financial promotions to individual recipients will be capable of being one-off. For example, any financial promotion which has the basic elements of selling the product is likely to be part of an organised marketing campaign and will not be a one-off.

01/06/2002

AUTH App 1.14.9

In the FSA's view, a person such as an investment manager or adviser is not conducting an organised marketing campaign purely because he regularly provides a particular client with financial promotions as part of his service. Neither is such a person conducting an organised marketing campaign purely because he may have several clients whose personal circumstances and objectives may suggest that a particular investment opportunity may attract them. If he considers the individual circumstances and objectives of each client before determining that the opportunity would be suitable for that client the financial promotions should be capable of being one-off.

01/06/2002

AUTH App 1.14.10

In the FSA's view, a person will not be making one-off financial promotions simply by sending out a series of letters to a number of customers or potential customers where a few details are changed (such as the name and address) but the bulk of the letter is standard. Such letters would be likely to be part of an organised marketing campaign.

01/06/2002

AUTH App 1.14.11

Article 28A was added by article 2 of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2001 (SI 2001/2633). It exempts one-off unsolicited real time financial promotions provided that the person making the financial promotion believes on reasonable grounds:

(1) that the recipient understands the risks associated with engaging in the investment activity to which the financial promotion relates; and

(2) (at the time the communication is made) that the recipient would expect to be contacted by him about the investment activity to which the financial promotion relates.

01/06/2002

AUTH App 1.14.12

In the FSA's view, the article 28A exemption should provide scope for persons such as professional advisers to make unsolicited real time financial promotions in various situations. For example, when approaching persons with whom their clients are proposing to do business or those persons? professional advisers. The exemption will not apply where the financial promotions are part of an organised marketing campaign (see AUTH App 1.14.4 G (G)(3)). So, in cases where a professional adviser is to contact a number of persons on a matter which involves each of them it will be necessary for him to consider whether the approaches would be part of an organised marketing campaign. For example, where they are significant shareholders in a company for which an offer has been made. In the FSA's opinion, provided the professional adviser considers the circumstances of each recipient and tailors the financial promotions to them it should be possible for the financial promotions to be regarded as one-off. Ultimately, however, the matter depends on the precise circumstances in which the financial promotions are made.

01/06/2002

AUTH App 1.14.13

Whether or not it would be reasonable to believe that any person understands the risks associated with the investment activity covered in a financial promotion or would expect to be contacted about it must be judged on the particular circumstances. In the FSA's opinion, the exemption requires that the recipient has the required understanding of risk at the time the promotion is made to him. However, it would be reasonable to believe that a person understands the risk involved if:

(1) he is understood to be a professional in relation to the investment activity to which the financial promotion relates;

(2) he is advised about the risks by a person who is professionally qualified to give such advice; or

(3) he has a position in a company which it is reasonable to suppose would require him to have such an understanding (such as a person who is in charge of a company's treasury function).

In the FSA's opinion, a person such as the managing director or finance director of a company that is seeking venture capital may reasonably be regarded as expecting to be contacted by or on behalf of a potential investor.

01/06/2002

Overseas communicators (articles 30-33)

AUTH App 1.14.14

There are a number of exemptions in the Financial Promotion Order relating to financial promotions sent into the United Kingdom by an overseas communicator who does not carry on certain controlled activities in the United Kingdom. These exemptions apply in addition to any other exemptions which may apply to any particular financial promotion by an overseas communicator.

01/06/2002

AUTH App 1.14.15

Article 30 exempts any solicited real time financial promotion made by an overseas communicator in the course of or for the purposes of certain controlled activities which he carries on outside the United Kingdom. This enables an overseas communicator, for example, to respond to an unprompted telephone enquiry made by a person in the United Kingdom or an enquiry which follows a financial promotion made by the overseas communicator and which was approved by an authorised person.

01/06/2002

AUTH App 1.14.16

In order to make an unsolicited real time financial promotion, an overseas communicator must rely on either article 32 or article 33. Article 32 provides an exemption for unsolicited real time financial promotions made by an overseas communicator to persons who were previously overseas and were a customer of his then. This is subject to certain conditions, including that, in broad terms, the customer would reasonably expect to be contacted about the subject matter of the financial promotion. Article 33 is similar to a sophisticated investor exemption and applies where the overseas communicator has reasonable grounds to believe that the recipient is knowledgeable enough to understand the risks associated with the controlled activity to which the financial promotion relates. It is also necessary for the recipient to have been informed that he will not gain the protections under the Act in respect of the activity or of the making of unsolicited real time financial promotions, and whether he will lose the benefit of dispute resolution and compensation schemes. The recipient must also have signified clearly that he accepts the position after having been given a proper opportunity to consider the information. There is no definition of a proper opportunity for this purpose. In the FSA's opinion it is likely to require the recipient to have a reasonable time to reflect on the matter and, if appropriate, seek other advice. What is a reasonable time, will depend upon the circumstances of the recipient, but, in the FSA's opinion, it is unlikely that a time of less than 24 hours will be enough.

01/06/2002

AUTH App 1.14.17

Article 31 exempts non-real time financial promotions made to previously overseas customers and subject to certain conditions. Again, to satisfy this exemption, the communicator must be based overseas and must be communicating with a person who was previously a customer of his while that person was overseas.

01/06/2002

Nationals of EEA States other than the United Kingdom (article 36)

AUTH App 1.14.18

This exemption allows a person in another EEA State who lawfully carries on a controlled activity in that State to promote into the United Kingdom. The terms of the exemption are that the promotion must comply with the financial promotion rules in COB 3. Care should be taken as any failure to satisfy any of the relevant requirements of COB 3 may mean that this exemption is not satisfied and that the financial promotion may breach section 21 if it has not been approved and no other exemption applies to it. The FSA recommends that anyone seeking to rely on this exemption either seeks professional advice or contacts the FSA before communicating the financial promotion. This exemption does not apply to unsolicited real time financial promotions.

01/06/2002

Joint enterprises (article 39)

AUTH App 1.14.19

Article 39 of the Financial Promotion Order exempts a financial promotion that:

(1) is communicated by one participator or potential participator in a joint enterprise to another; and

(2) is in connection with or for the purposes of that enterprise.

A joint enterprise means, in general terms, arrangements entered into by two or more persons for commercial purposes related to a business that they carry on. The business must not involve a controlled activity. The term 'participant' includes other members of a group of which a participant is a member.

01/06/2002

AUTH App 1.14.20

In the FSA's opinion;

(1) it will not matter that a person enters into arrangements for investment or other purposes provided that he also enters them into for commercial purposes; and

(2) each participant must be carrying on the business in question in their own right.

This means that the sponsors or promoters of a company who arrange for private investors to become shareholders will not be setting up a joint enterprise simply because the company may intend to carry on a relevant business which is not a controlled activity. Examples of a joint enterprise include a special purpose company owned by the participants and set up to operate a commercial project or to hold property of some kind. The participants in joint enterprises of this kind would typically be businesses which are to undertake work on the project or property development and investment companies.

01/06/2002

Certified high net worth individuals (article 48)

AUTH App 1.14.21

This exemption disapplies the restriction in section 21 of the Act from non-real time financial promotions or solicited real time financial promotions which are made to a certified high net worth individual and relate to certain investments. These investments must be either;

(1) shares in or debentures of an unlisted company; or

(2) warrants, certificates representing certain securities, options, futures or contracts for differences relating to shares in or debentures of an unlisted company; or

(3) collective investment schemes investing predominantly in shares in or debentures of an unlisted company.

There is an additional requirement that the recipient must have no contingent liability so that the maximum he may lose is the amount he invests. The term 'unlisted company' is defined in article 3 of the Financial Promotion Order. This exemption is expected to be of help to unlisted companies seeking venture capital.

01/06/2002

AUTH App 1.14.22

To be certified as a high net worth individual, the individual concerned must have earned at least £100,000 or have held net assets to the value of more than £250,000 throughout the financial year before the date of the certificate. Where the financial promotion is an outgoing electronic commerce communication, the earnings or net assets may be of an equivalent amount in another currency. To be current, the certificate must be signed and dated by the individual's accountant or employer within twelve months of the date on which the communication is made. The financial promotion must not invite the recipient to engage in investment activity with the person who has signed the certificate. There is, however, nothing to prevent an accountant signing a certificate for an individual for whom he may be providing investment services of any kind. This is provided he does not seek to use the article 48 exemption to make financial promotions to the individual. The exemption can be used by associates or group members of the person who signs the certificate.

01/10/2002

AUTH App 1.14.23

In addition, the financial promotion must contain certain information and the recipient must have previously (within the last 12 months) signed a statement in the terms in article 48(2)(b) of the Financial Promotion Order.

01/06/2002

AUTH App 1.14.24

A person seeking to make a financial promotion to another person may wish to make enquiries of that person to establish whether he is certified. Unless another exemption applies or the financial promotion is approved by an authorised person, such enquiries will not be possible if the enquiry communication is an inducement or invitation to engage in investment activity. In the FSA's view, a communication which is merely an enquiry seeking to establish that a person holds a current certificate will not itself be an inducement or invitation. Once it has been established that the person qualifies as a certified high net worth individual financial promotions about the controlled investments in AUTH App 1.14.21 G may then be sent to him under article 48. AUTH App 1.4.27 G offers further guidance on this.

01/06/2002

High net worth companies, unincorporated associations and trusts (article 49)

AUTH App 1.14.25

This exemption works on a different basis to that for high net worth individuals. There is no requirement for a certificate or statement to be signed. Instead, the person making the promotion must believe on reasonable grounds that the recipients are high net worth companies, unincorporated associations or trusts or be reasonably regarded as directing the financial promotion only at such persons. A high net worth company, unincorporated association or trust is a person who satisfies the conditions in article 49(2)(a) to (e) which, for the most part, involve the amount of assets held.

01/06/2002

AUTH App 1.14.26

Article 49(4) gives the list of conditions which, if all are met, is proof that the financial promotion is directed at relevant persons. It is not necessary for all or any of the conditions to be met for a financial promotion to be regarded as directed at relevant persons. Ultimately the matter will be one of fact to be determined by taking account of the circumstances in which the financial promotion is made. In the FSA's opinion, it is not necessary for a financial promotion, to comply with the condition in article 49(4)(a) that there be an indication of the types of person to whom it is directed, to refer in detail to the terms of article 49(2). It will be enough that it is clear that the financial promotion is directed at persons to whom article 49 applies. Persons using article 49 will need, however, to consider the extent to which recipients of the financial promotion are likely to understand the indication. An appropriate approach may often be to refer to the financial promotion being 'directed at high net worth companies, unincorporated associations etc for the purposes of article 49' or similar.

01/06/2002

Sophisticated investors (article 50)

AUTH App 1.14.27

To be a sophisticated investor, the recipient of a financial promotion must have a current certificate from an authorised person stating that he has enough knowledge to be able to understand the risks associated with the description of investment to which the financial promotion relates. Where the financial promotion is an outgoing electronic commerce communication, the certificate may be signed by a person who is entitled, under the law of an EEA State other than the United Kingdom, to carry on regulated activities in that EEA State. The FSA considers that a 'description of investment' relates to a category of investments with similar characteristics. Examples are given below.

(1) The shares in a private company are not the same 'description of investment' as shares in a plc as there will usually be certain significant distinctions. For instance, there will often be restrictions on the transfer of shares in a private company.

(2) Shares traded on a market or exchange will be a different 'description of investment' to unlisted shares.

(3) Shares which have similar characteristics will be of the same 'description of investment' irrespective of whether they are shares of companies in the same market or geographical sector.

The recipient must also have signed a statement in the terms in article 50(1)(b). The financial promotion must not invite or induce the recipient to engage in investment activity with the person who has signed the certificate. But it may invite or induce the recipient to engage in investment activity with an associate or group member of that person.

01/10/2002

AUTH App 1.14.28

The exemption also requires that certain warnings are given to the potential investor. In this respect, article 50(3)(d) provides that the financial promotion must state that there is a significant risk of losing all monies invested or of incurring additional liability. In the FSA's view, these are alternative statements and whichever is the relevant statement should be included. If there is no risk of incurring additional liability the statement may simply say that there is a risk of losing the sum invested. This is a mandatory requirement, although the exemption under article 50 may be used to promote investments for which either statement would be inappropriate or potentially confusing (for instance if it is used to offer gilts). The FSA cannot fetter its discretion to decide individual cases on their merits. However, where a person seeks to rely on the article 50 exemption for a financial promotion which would otherwise satisfy the terms of article 50 but which omits the statement required under article 50(3)(d), on the grounds that it would be misleading to include it, the FSA would, generally, take no further action.

01/06/2002

Associations of high net worth or sophisticated investors (article 51)

AUTH App 1.14.29

This exemption allows a non-real time or solicited real time financial promotion to be made to an association with a particular membership. Membership of this association must be reasonably believed to be wholly or predominantly certified high net worth individuals, high net worth companies or unincorporated associations or trusts, or sophisticated investors. The financial promotion must not relate to an investment under the terms of which a person can incur additional liability of more than his original investment. In each case, whether the membership of an association is predominantly made up of high net worth individuals, high net worth companies or unincorporated associations or trusts, or sophisticated investors will be a question of fact. The exemption may be expected to be likely to apply, for example, to financial promotions to business angel networks. In the FSA's view, the exemption allows for financial promotions to be made to the members of the association. It is not restricted to financial promotions made to the operator or secretariat of the association.

01/06/2002

Common interest group of a company (article 52)

AUTH App 1.14.30

Article 52 concerns non-real time and solicited real time financial promotions about offers of shares or debentures of a company. The offers must be made only to or be reasonably regarded as only directed at certain persons. These persons must belong to an identified group of persons who, when the financial promotion is made, might reasonably be regarded as having an existing and common interest with each other and the company.

01/06/2002

AUTH App 1.14.31

The exemption is subject to certain conditions. In broad terms, these are that the financial promotion must be accompanied by an indication:

(1) that the directors or promoters of the company have taken all reasonable care to ensure that the financial promotion is true and not misleading;

(2) that the directors or promoters have not limited their liability;

(3) that any person who is in doubt about the investment should consult an authorised person; and

(4) that:

(a) the directors or promoters of the company have taken all reasonable care to ensure that potential investors have access to relevant information about the company; or

(b) any person considering investing in the company should regard his subscription as helping the company to meet its non-financial objectives and only secondarily, if at all, as an investment.

Where the financial promotion is an outgoing electronic commerce communication, the reference in (3) to an authorised person includes a person who is entitled, under the law of an EEA State other than the United Kingdom, to carry on regulated activities in that EEA State.

01/10/2002

AUTH App 1.14.32

In line with other exemptions, article 52 contains indicators which, if all are met, mean that the financial promotion is directed at relevant persons.

01/06/2002

AUTH App 1.14.33

Example of situations where article 52 is likely to apply include offers made by:

(1) a club or association which is considering incorporation to its members;

(2) a private school to the parents of its pupils; and

(3) a company to its existing members or creditors (where the exemption in article 43 might also be expected to apply).

01/06/2002

AUTH App 1.14.34

However, persons are not to be regarded as having a common interest with each other and a company simply because:

(1) they would have such an interest if they became its members or creditors;

(2) they all carry on a particular trade or profession; or

(3) they have an existing business relationship with the company whether by being it clients, customers, contractors, suppliers or otherwise.

01/06/2002

Sale of body corporate (article 62)

AUTH App 1.14.35

The exemption in article 62 of the Financial Promotion Order applies to any financial promotion communicated by or on behalf of a body corporate, a partnership, an individual or a group of connected individuals. The financial promotion must relate to a transaction which is one to acquire or dispose of shares in a body corporate and either:

(1) it is the case that:

(a) the shares, in addition, where appropriate, to any shares already held by the buyer, amount to 50% or more of the voting shares in the body corporate; and

(b) the party or parties who act as seller is a body corporate, a partnership, a single individual or a group of connected individuals and the party or parties who act as buyer is also one or other of these (but not necessarily the same type as the seller); or

(2) where the conditions in (1) are not met, but the object of the transaction may reasonably be regarded as being the acquisition of day to day control of the affairs of the body corporate.

01/06/2002

AUTH App 1.14.36

A group of connected individuals is defined in article 62(4) of the Financial Promotion Order as being a group of persons each of whom is (for sellers) or is to be (for buyers):

(1) a director or manager of the body corporate;

(2) a close relative of such a person; or

(3) a person acting as trustee for a person as referred to in (1) or (2)

01/06/2002

AUTH App 1.14.37

In the FSA's view, a main aim of the exemption (see AUTH App 1.14.35 G (1)) is to remove from the scope of section 21 a financial promotion concerning the sale of a corporate business by a person who, either alone or with others, controls the business to another person who, either alone or with others, proposes to control the business.

01/06/2002

AUTH App 1.14.38

In any case where the conditions referred to in AUTH App 1.14.35 G (1) are not met, it will be necessary to consider the circumstances in which the transaction is to take place in order to determine whether its objective is the acquisition of day to day control (see AUTH App 1.14.35 G (2)). In situations where the 50% holding of voting shares test is not met it is still possible that the objective of a transaction could be the acquisition of day to day control. For instance, because the remaining shareholders represent a large number of small shareholders who it is reasonable to suppose will not regularly act in concert.

01/06/2002

AUTH App 1.14.39

Where the nature of the parties test (see AUTH App 1.14.35 G (1)(b)) is not met and the purpose for which the person who is the buyer holds or proposes to hold the voting shares is considered, it may still be the case that the objective of the transaction is the acquisition of day to day control. This may typically be because there are two or more parties involved as buyer and they do not collectively represent a group of connected individuals as defined. For example, this may happen where the shares are to be held by one of the following persons who intends to acquire control either alone or with others:

(1) a person (of either sex) with whom a person who is to be a manager or director cohabits;

(2) a venture capital company which proposes to invest in the company and which is to provide a representative to act as a manager or director of the company; or

(3) a private company used as a vehicle to hold shares by a person who is to be a manager or director of the company (or his close relative).

01/06/2002

AUTH App 1.14.40

In the FSA's opinion, provided that the purpose of the transaction is for the buyer to acquire the necessary control, it is irrelevant who is the seller. The exemption specifically applies to financial promotions which are communicated on behalf of the parties or potential parties to the transaction. The FSA is aware that the Treasury has received comments about the scope of article 62. These are being considered but no decision has been taken on whether to propose any change. If the Treasury were minded to propose any change it would expect to consult publicly first.

01/06/2002

Other issues

AUTH App 1.14.41

Several exemptions, including article 43 of the Financial Promotion Order (Members and creditors of certain bodies corporate), apply only in relation to relevant investments being shares or debentures in the body corporate or a member of its group, or warrants or certificates representing certain securities relating to such shares or debentures. In the FSA's view, an exchangeable debt security which is partly a debenture and partly an option is a relevant investment for these purposes.

01/06/2002

AUTH App 1.14.42

The exemptions for bearer instruments (articles 41 and 42 of the Financial Promotion Order) relate to financial promotions made to or directed at persons entitled to bearer instruments. For clarity, the FSA takes the view that persons who hold bearer instruments through a clearing system such as Euroclear or Clearstream are persons entitled to those instruments for the purposes of articles 41 and 42.

01/06/2002

AUTH App 1.15

Financial promotions by members of the professions (articles 55 and 55A)

01/12/2004

Real time financial promotions by professional firms

AUTH App 1.15.1

Article 55 of the Financial Promotion Order contains a specific exemption for professional firms allowing them to make solicited or unsolicited real time financial promotions. or This is provided the financial promotion is made:

(1) by a person who carries on a regulated activity without needing authorisation under the Part XX exemption; and

(2) to someone who has already (that is, before the financial promotion is made) engaged the person making the financial promotion to provide professional services (that is services which are not regulated activities and whose provision is supervised and regulated by a Designated Professional Body).

01/06/2002

AUTH App 1.15.2

The article 55 exemption also requires that:

(1) the financial promotion relates to an activity to which the Part XX exemption applies or which would be a regulated activity but for the exclusion in article 67 of the Regulated Activities Order (Activities carried on in the course of a profession or non-investment business) which concerns activities which are a necessary part of professional services; and

(2) the activity to which the financial promotion relates would be undertaken for the purposes of, and be incidental to, the provision of professional services to or at the request of the recipient.

01/06/2002

AUTH App 1.15.3

The FSA considers that, to satisfy the condition in AUTH App 1.15.2 G (2) that an activity be incidental to the provision of professional services, regulated activities cannot be a major part of the practice of the professional firm. The FSA also considers that the following further factors are relevant.

(1) The scale of regulated activity in proportion to other professional services provided.

(2) Whether and to what extent services that are regulated activities are held out as separate services.

(3) The impression given of how the professional firm provides regulated activities, for example, through its advertising or other promotions of its services.

In the FSA's opinion, one consequence of this is that the professional firm cannot provide services which are regulated activities if they amount to a separate business to the provision of professional services. This does not, however, preclude the professional firm operating its professional business in a way which involves separate teams or departments one of which handles the regulated activities.

01/06/2002

AUTH App 1.15.4

One of the effects of the requirements in AUTH App 1.15.2 G concerns financial promotions which relates to an activity which is not a regulated activity as the result of an exclusion in the Regulated Activities Order. In this case, a professional firm using the Part XX exemption cannot make a real time financial promotion relying on article 55 of the Financial Promotion Order unless the exclusion is provided by article 67 of the Regulated Activities Order. Neither can a professional firm rely on article 55 to make real time financial promotions, in connection with the provision of professional services to an existing client, if the financial promotions are made to a third party. Third parties may be prospective counterparties, rather than a client. In such circumstances, another exemption would need to be available.

01/06/2002

Non-real time financial promotions by professional firms

AUTH App 1.15.5

Article 55A of the Financial Promotion Order was added by article 2(b) of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2001 (SI 2001/2633). It exempts non-real time financial promotions where the financial promotion:

(1) is made by a person who carries on a regulated activity without needing authorisation under the Part XX exemption (referred to in AUTH App 1.15.6 G and AUTH App 1.15.7 G as 'Part XX activities'); and

(2) contains a specified statement and is limited in its content to the matters referred to in AUTH App 1.15.6 G.

01/06/2002

AUTH App 1.15.6

A financial promotion made under article 55A must contain a statement in the following terms: 'The [firm/company] is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of [relevant designated professional body]. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide'. The financial promotion may also set out the Part XX activities which the person is able to offer to his clients, provided it is clear that these are the incidental services to which the statement relates. In the FSA's view, the requirement that a financial promotion must contain a statement in the specified terms does not prevent minor changes to the text. This is provided they do not alter or otherwise change the meaning of the statement. For example, replacing 'we' with the name of the firm or 'because' with 'as' or (where relevant) 'members of' with 'licensed by the' would be acceptable.

01/06/2002

AUTH App 1.15.7

The article 55A exemption should enable professional firms to issue brochures, websites and other non-real time financial promotions without any need for approval by an authorised person. This is provided the financial promotion does not also contain an invitation or inducement relating to regulated activities other than those covered by the Part XX exemption. In this respect, it should be noted that, unlike article 55, the article 55A exemption does not extend to activities which are excluded under article 67 of the Regulated Activities Order. The FSA takes the following views in relation to article 55A.

(1) It is not necessary for the details of the Part XX activities to be set out in one place or adjacent to the statement. A brochure or website, for example, may contain details of Part XX activities in various places so long as it is made clear that they will be incidental investment activities as referred to in the statement. So, this only needs to be set out once in the brochure or website.

(2) The inclusion of contact details would be regarded as part of the description of Part XX activities.

(3) A financial promotion made under article 55A may be likely, on occasion, to result in the carrying on by the professional firm of activities which are excluded under the Regulated Activities Order. However, this does not mean that the financial promotion will fail to satisfy the terms of article 55A. There will be occasions where a professional firm will have to offer to provide services which may or may not involve Part XX activities or excluded activities. In the area of corporate finance, for example, a professional firm may offer its services in relation to the sale of an incorporated business or a substantial shareholding in such a business. It will not be clear whether the professional firm's services will be Part XX activities or excluded activities until the details of a proposed deal are known. Similarly, a professional firm may offer services which in some instances, will fall under the 'necessary' exclusion in article 67 of the Regulated Activities Order but, in others, will be Part XX activities. In practice, it will often be impossible for a professional firm to distinguish between Part XX activities and excluded activities at the preliminary stage of a brochure or website offering its services. In the FSA's view, the article 55A exemption will apply provided the only regulated activities held out in the brochure, website or other non-real time financial promotion are Part XX activities. It will, of course, be possible for a professional firm to make an offer involving excluded activities to a person who responds to a financial promotion issued under article 55A. But this is provided another exemption (such as the one-off financial promotion exemption (see AUTH App 1.14.3 G)) is available in respect of any subsequent financial promotions.

01/06/2002

AUTH App 1.16

Financial promotions concerning funeral plans

01/12/2004

AUTH App 1.16.1

Section 21 of the Act came into force for financial promotions about funeral plans on 1 January 2002. A financial promotion about funeral plans is subject to the restriction in section 21 of the Act if it relates to a pre-paid funeral plan of any kind where the provider of the plan carries on the regulated activity of entering into funeral plan contracts under article 59 of the Regulated Activities Order (see AUTH 2.8.14 G). This is the case even if the actual plan being promoted is excluded under article 60 of the Regulated Activities Order. However, providers may choose only to enter into funeral plan contracts which are excluded under article 60 of the Regulated Activities Order. If this is the case, any financial promotion relating to those plans will not be subject to the restriction in section 21 of the Act.

01/06/2002

AUTH App 1.17

Introduction

01/12/2004

AUTH App 1.18

Financial promotions concerning the Lloyd's market

01/12/2004

AUTH App 1.18.1

A person involved in insurance business written at Lloyd's may be making financial promotions when attracting another person:

(1) to effect or carry out contracts of insurance written at Lloyd's (where the controlled activity which is the subject of the financial promotion is effecting and carrying out contracts of insurance);

(2) to have assets held under funds at Lloyd's (where the controlled activity may involve dealing in securities and contractually based investments, arranging deals in investments,managing investments or safeguarding and administering investments);

(3) to participate in particular syndicates at Lloyd's (where the controlled activity is advising on syndicate participation or arranging deals in syndicate participations or underwriting capacity);

(4) to participate indirectly in the Lloyd's market as a shareholder of a corporate underwriting member or a limited partner in a limited liability partnership which is an underwriting member (where the controlled activity is dealing in, arranging deals in or advising on shares or units); or

(5) to take out insurance which is written at Lloyd's (where the controlled activity is effecting a contract of insurance).

01/06/2002

AUTH App 1.18.2

Any persons making financial promotions as referred to in AUTH App 1.18.1 G (3) and AUTH App 1.18.1 G (4) are likely to be authorised persons. As such they will be subject to COB 3. Any persons making financial promotions as referred to in AUTH App 1.18.1 G (1), AUTH App 1.18.1 G (2) and AUTH App 1.18.1 G (5) may not be authorised persons and, if so, will need to ensure that their financial promotions are approved by an authorised person or that a specific exemption applies (see AUTH App 1.13).

01/06/2002

AUTH App 1.19

Additional restriction on the promotion of life policies

01/12/2004

AUTH App 1.19.1

Article 10 of the Financial Promotion Order (Application to qualifying contracts of insurance) precludes any of the exemptions from applying to a financial promotion which invites or induces a person to enter into a life policy with a person who is not:

(1) an authorised person;

(2) an exempt person who is exempt in relation to effecting or carrying out contracts of insurance of the class to which the promotion relates;

(3) a company with its head office or a branch or agency in another EEA State and which is entitled to carry on in that country the class of insurance business being promoted;

(4) a company authorised in one of the following countries or states to carry on the class of insurance business being promoted :

(a) Guernsey;

(b) the Isle of Man;

(d) Iowa; or

(e) Jersey.

COB 3.13.1 R imposes a similar restriction on authorised persons concerning their communicating or approving financial promotions in the precluded circumstances.

01/06/2002

AUTH App 1.20

Additional restriction on the promotion of collective investment schemes

01/12/2004

AUTH App 1.20.1

Where collective investment schemes are concerned additional restrictions are placed on their promotion to ensure that only those which are regulated are promoted to the general public. This is achieved by a combination of sections 21 and 238 (Restrictions on promotion) of the Act as explained in AUTH App 1.20.2 G. A regulated collective investment scheme is:

(1) an authorised unit trust scheme;

(2) an investment company with variable capital;

(3) a scheme recognised under section 264 of the Act (Schemes constituted in other EEA States).

(4) a scheme recognised under section 270 of the Act (Schemes authorised in designated countries or territories); or

(5) a scheme recognised under section 272 of the Act (Individually recognised overseas schemes).

01/06/2002

AUTH App 1.20.2

Section 21 precludes the promotion by unauthorised persons of unregulated collective investment schemes unless the financial promotion is approved by an authorised person or is exempt. Section 238 then precludes the promotion of an unregulated collective investment scheme by authorised persons except where:

(1) there is an exemption in an order made by the Treasury under section 238(6);

(2) the financial promotion is permitted under rules made by the FSA under section 238(5) to exempt the promotion, otherwise than to the general public, of schemes of certain descriptions; or

(3) the scheme is a single property scheme and its promotion is exempt under regulations made by the Treasury under section 239 of the Act (Single property schemes).

In addition, section 240 of the Act (Restriction on approval of promotion) precludes an authorised person from approving a financial promotion for the purpose of section 21 if he would not be able to communicate it himself under section 238.

01/06/2002

AUTH App 1.20.3

The Treasury has made an order under section 238(6). This is the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (as amended by article 3 of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2001, SI 2001/2633) and by articles 7 to 10 of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (Electronic Commerce Directive) Order 2002, SI 2002/2157) ('the CIS Financial Promotion Order'). The overall effect of the CIS Financial Promotion Order is to ensure that authorised persons are able to promote an unregulated collective investment scheme at least as widely as an unauthorised person is allowed to do under section 21 without needing the approval of an authorised person. In general terms, the order contains exemptions equivalent to those in the Financial Promotion Order which are relevant to units in an unregulated collective investment scheme. Guidance in AUTH App 1 relating to exemptions in the Financial Promotion Order will apply equally to those exemptions where they appear in the CIS Financial Promotion Order. The main exception to this relates to the exemption for one-off financial promotions in article 15 of the CIS Financial Promotion Order. That article provides conditions which, if met, are conclusive proof that a financial promotion is one-off. However, these do not include the condition that the identity of the product or service must be determined having regard to the recipient's circumstances (see AUTH App 1.14.3 G (2) and AUTH App 1.14.4 G (2)).

01/10/2002

AUTH App 1.20.4

The FSA has made rules under section 238(5) which allow authorised firms to communicate or approve a financial promotion for an unregulated collective investment scheme in certain specified circumstances. These circumstances are set out in COB 3 Annex 5 and referred to in COB 3.11. To date, the Treasury has not made an order exempting single property schemes under section 239.

01/06/2002

AUTH App 1.21

Company statements, announcements and briefings

01/12/2004

AUTH App 1.21.1

There is a general concern that the practice of companies issuing statements and giving briefings may involve a financial promotion. These arise sometimes as a result of requirements imposed by a listing authority or an exchange or market, AUTH App 1.4.14 G offers guidance on when such statements or briefings may amount to or involve an inducement to engage in investment activity. It indicates that whilst statements of fact alone will not be inducements, there may be circumstances where there is a promotional element which may amount to an inducement (typically to buy the company's shares). In the FSA's experience, it is rare for company statements or briefings to involve an invitation.

01/06/2002

AUTH App 1.21.2

It is common practice for listed companies to brief analysts, usually at the time of the company's preliminary, interim and, if applicable, quarterly results and after the information has been issued to the market as a whole. Briefings may be made personally to a small or large number of analysts in a meeting or through a conference call. It is increasingly becoming the practice for listed companies to make their briefings available live to journalists and the general public on the basis that they may listen to or view, but not take part in, the briefing and any question and answer session. This is usually done through a conference call or a live broadcast (usually termed a webcast) through the company's website or the website of a specialist provider. Where such briefings include a financial promotion they must be approved by an authorised person (if they are non-real time financial promotions) or exempt.

01/06/2002

AUTH App 1.21.3

AUTH App 1.21.4 G to set out the FSA's views on the potential relevance of certain exemptions to company statements and briefings. The exemptions are referred to in the same order as the Financial Promotion Order. In the FSA's view, these exemptions (whether alone or, where applicable, in combination) should enable most statements and briefings which involve financial promotions to be made by the company concerned without the need for approval. In particular, the FSA considers that article 69 (see ) should ensure that financial promotions made during the course of analyst briefings by listed and AIM companies are exempt and do not require approval. Some but not all of these exemptions apply equally to financial promotions which are communicated by a third party (for instance, a public relations adviser) on behalf of its corporate client. Those exemptions which are not available to a third party in such circumstances are those contained in article 20A (see ), 59 (see ), and 69 (see ).

01/06/2002

Article 17: Generic promotions

AUTH App 1.21.4

Any statement or briefing which did not identify the company as an issuer of securities (for example, by referring to its securities) and which does not identify any other particular investment or provider of investments or investment services will be exempt as a generic promotion (see AUTH App 1.12.14 G). In practice, it will be unlikely that such a statement or briefing would involve a financial promotion but the article 17 exemption may be useful where any doubt arises.

01/06/2002

Article 19: Investment professionals

AUTH App 1.21.5

Where statements or briefings are only available to analysts who are, or who work for, authorised persons (including overseas persons who would need to be authorised if they were conducting their business in the United Kingdom), article 19 will exempt any financial promotion that may be made (see AUTH App 1.12.21 G). Furthermore, where a financial promotion is made in the course of an interactive dialogue with an analyst and is addressed to him, the financial promotion will be regarded as having been made to that analyst irrespective of who else may hear or view it (article 6(b) of the Financial Promotion Order (see AUTH App 1.6.9 G). For example, where a representative of the company is responding to a particular question article 19 would then apply. This is not to say that every time a company representative answers a question his response, if it involves a financial promotion, will be addressed to the questioner for the purpose of article 6(b). This will depend upon the particular circumstances.

01/06/2002

Article 20A: Promotion broadcast by company director etc

AUTH App 1.21.6

AUTH App 1.12.32 G contains detailed guidance on the exemption in article 20A. The exemption is capable of applying to financial promotions in a company statement or briefing where they are communicated through a webcast if the website is a regularly updated news or information service. For this to be the case, the website must be a service provided to persons who use it (so it must not, for example, simply be an advertising vehicle) and that service must be one of providing news or information which will be updated regularly. This is capable of applying to some corporate websites. For example, the website of a company may amount to a service of information about the company's activities, services and products which is regularly updated and the webcast may be seen as part of that service. Not all corporate websites will qualify, however, and each website must be considered on its merits. Company representatives seeking to use this exemption will need to bear in mind any restrictions on the making available of certain information to which they may be subject (for example, under listing rules).

01/06/2002

Article 28 and 28A: One off promotions

AUTH App 1.21.7

Article 28 applies to one-off non-real time and solicited real time financial promotions. Article 28A applies to one-off unsolicited real time financial promotions. It is possible that articles 28 or 28A could apply to financial promotions in company statements or briefings if they were to be made other than to an analyst or journalist. In this respect, the comments made in AUTH App 1.14.3 G about one-off financial promotions are relevant.

01/06/2002

Article 43: Members and creditors of certain bodies corporate

AUTH App 1.21.8

Article 43 applies to non-real time and solicited real time financial promotions made by a company ('C') to persons who, in broad terms, are:

(1) members or creditors of C or a group member of C ('G');

(2) entitled to a relevant investment issued by C or G;

(3) entitled to become a member of C or G; or

(4) entitled to have transferred to them title to a relevant investment issued by C or G.

The financial promotion must relate only to relevant investments issued or to be issued by C or G or, in certain circumstances, another person (see AUTH App 1.21.9 G (2). C and G must not be open-ended investment companies.

01/06/2002

AUTH App 1.21.9

A 'relevant investment' in article 43 means:

(1) shares or debentures; and

(2) warrants and certificates representing certain securities relating to (1) and issued by G or a person acting on behalf of or under arrangements made with C.

Article 43 allows a company to communicate a financial promotion to its shareholders about rights issues or a cash offer by a third party for their shares. It also allows a company to communicate with its creditors about restructuring debt obligations. It does not, however, exempt persons who may make financial promotions on behalf of a company.

01/06/2002

Article 47: Persons in the business of disseminating information

AUTH App 1.21.10

Article 47 will exempt financial promotions in company statements or briefings where they are made to members of the press and may be combined with article 19 (Investment professionals). This means that companies will only need to look for other exemptions where the recipients of their financial promotions are persons other than analysts or journalists or both.

01/06/2002

Article 59: Annual accounts and directors' report

AUTH App 1.21.11

Article 59 is capable of applying to financial promotions in company statements and briefings where they are accompanied by:

(1) the whole or any part of the annual accounts of the company (provided it is not an open-ended investment company); or

(2) any report prepared and approved by the directors of such a company under section 234 and 234A of the Companies Act 1985 or corresponding legislation in Northern Ireland or in another EEA State.

In this respect, the FSA considers that the annual accounts (or part of them) or directors' report accompanies a financial promotion where it is made available to the recipients of the financial promotion at the same time. The financial promotion should refer to the accompanying material. For example, the accounts or report may be available on a company's website and referred to in a financial promotion on that website. Or they may be contained in or enclosed with a written communication (including an e-mail) or handed over during a meeting or discussion.

01/06/2002

AUTH App 1.21.12

Article 59 imposes certain conditions.

(1) The financial promotion must be an inducement and not be an invitation or amount to advice to acquire or dispose of an investment.

(2) The inducement must not relate to any investment other than shares or debentures of the company making the financial promotion (or a member of its group) or warrants relating to or certificates representing such shares or debentures.

(3) If the financial promotion contains any reference to past prices of or yields on the company's securities as referred to in (2), it must be accompanied by a statement that past performance cannot be relied on as guide to future performance.

01/06/2002

Article 67: Promotions required or permitted by market rules

AUTH App 1.21.13

Article 67 exempts any financial promotion other than an unsolicited real time financial promotion which relates to shares, debentures, government and public securities, warrants or certificates representing certain securities which are permitted to be traded or dealt in on a relevant market. A relevant market for the purposes of article 67 is one which meets the criteria in Part I of, or is specified in or established under the rules of an exchange specified in Parts II or III of, schedule 3 to the Financial Promotion Order. This includes recognised investment exchanges and EEA regulated markets that are exempt persons under article 36 of the Exemption Order, together with various other overseas markets (including OFEX (UK)). The financial promotion must, however, be required or permitted to be communicated by the rules of the market or by a body which either regulates the market or regulates offers or issues of investments to be traded on the market.

01/10/2002

AUTH App 1.21.14

The reference to financial promotions which are permitted to be communicated relates, in the FSA's opinion, to something which is expressly permitted rather than simply not expressly prohibited. Article 67 itself does not specify any particular medium for communicating required or permitted material. So, it will be enough for the financial promotion to be part of a document which is itself required or permitted to be communicated (such as reports or financial statements). Market rules or usual market practice may require the financial promotion to be communicated in a particular form or by a particular medium. However. the exemption will still apply if the financial promotion is communicated in a different form or by a different medium provided that its substance is unchanged. But article 67 will not apply to a financial promotion simply because it is included in another document which is required or permitted where the financial promotion amounts to additional information to that which is required or permitted. Neither does article 67 specify what form permission can take. In the FSA's view, however, permission would need to be given either in rules or guidance applicable to the market in question.

01/06/2002

AUTH App 1.21.15

Article 67 refers to an investment which is permitted to be traded or dealt in on a relevant market. In the FSA's opinion, this includes a situation where a class of securities is traded on a relevant market but the financial promotion relates to new securities of that class which have not yet themselves been issued or started trading. Where securities of that class have not yet been admitted to trading on a relevant market, article 68 may apply: see AUTH App 1.21.16 G.

01/06/2002

Article 68: Promotions in connection with admission to certain EEA markets

AUTH App 1.21.16

Article 68 applies where the financial promotion relates to securities which have not yet been admitted to trading but for which application has been or is to be made. It exempts a non-real time financial promotion or a solicited real time financial promotion which a relevant EEA market requires to be communicated before admission to trading can be granted. A relevant EEA market for this purpose is a market with its head office in an EEA State and which meets the conditions in Part I of, or is specified in or established under the rules of an exchange specified in Part II of, Schedule 3 to the Financial Promotion Order. Article 68 also requires that the financial promotion be one:

(1) which, if it were included in a prospectus issued in line with Part II of the Public Offers of Securities Regulations 1995 (or, where it is an outgoing electronic commerce communication, provisions corresponding to that Part under the law of another EEA State), would be required to be communicated by those Regulations (or other provisions); and

(2) which is not accompanied by any information other than that information which is required or permitted to be published by the rules of the relevant EEA market.

01/10/2002

Article 69: Promotion of securities already admitted in certain markets

AUTH App 1.21.17

Article 69 is similar to article 59 in the conditions it imposes (see AUTH App 1.21.12 G). These are two main differences between article 69 and article 59.

(1) Article 69 does not apply to unsolicited real time financial promotions.

(2) The requirement in article 59 that the financial promotion be accompanied by accounts or a report is replaced in article 69. It is replaced by a requirement that shares or debentures of the company or its parent undertaking (or warrants relating to or certificates representing such investments) are permitted to be traded or dealt in on a relevant market (relevant market having the same meaning as in article 67 - see AUTH App 1.21.13 G).

01/06/2002

AUTH App 1.21.18

Article 69 exempts financial promotions about 'investments issued by' a company or a member of its group. An issue arises about whether the term 'investments issued by' a company includes investments which are 'to be issued by' a company. In the FSA's view, there is a case for arguing that this is the effect although the matter is not beyond doubt. Article 69 replaces an earlier exemption made under section 58(3) of the Financial Services Act 1986 and which applied to investments which were to be issued. The FSA understands that article 69 was not intended to be narrower in scope that it predecessor. The FSA considers that the better view is that article 69 applies where investments are 'to be issued'.

01/06/2002

AUTH App 1.21.19

In the FSA's opinion, companies whose securities are permitted to be traded or dealt in on a relevant market should be able to make good use of the article 69 exemption. But such companies will need to ensure that they meet the specific requirements in article 69(3) to (6). In very general terms, a financial promotion will comply with these requirements if:

(1) the only reason it is a financial promotion is that it contains an inducement about certain investments issued by the company or a group member and which does not amount to advice to any person to acquire or dispose of such investments; and

(2) should it contain any reference to past prices of or yields on the company's investments, it is accompanied by a statement that past performance cannot be relied on as a guide to future performance.

01/06/2002

Article 71: Promotions included in listing particulars, etc

AUTH App 1.21.20

Article 71 applies to a non-real time financial promotion included in:

(1) listing particulars;

(2) supplementary listing particulars;

(3) a prospectus approved under listing rules under section 84 or 87 of the Act;

(4) a supplementary prospectus approved under listing rules made under section 81 of the Act (as applied by section 86 or 87); and

(5) any other document required or permitted to be published by listing rules under part VI of the Act.

The comments in AUTH App 1.21.14 G about when something is required or permitted to be published apply also to (5).

01/06/2002

General issues

AUTH App1.21.21

A requirement common to the exemptions in articles 59, 67 and 69 is that the financial promotions must not relate to investments other than those issued by the company or a member of its group. The FSA is aware that there is concern about comments made in company statements or briefings. This is that they may be held to be inducements to acquire or dispose of, or exercise rights conferred by, an investment issued by a third party. For example, traded options on or certificates representing the company's shares. AUTH App 1.4 sets out the FSA's general views on when a communication is an inducement. It appears to the FSA that, for a company statement or briefing to involve an inducement to persons to, for example, exercise rights under a traded option written on or acquire certificates representing the securities, it must seek to persuade or induce persons specifically to do that. The mere fact that a person reading, hearing or viewing a company statement or briefing containing an inducement to acquire the company's securities may be influenced to exercise traded options which he holds is not enough to make it an inducement to exercise those rights.

01/06/2002

AUTH App 1.22

The internet

01/12/2004

AUTH App 1.22.1

The Internet is a unique medium for communicating financial promotions as it provides easy access to a very wide audience. At the same time, it provides very little control over who is able to access the financial promotion.

01/06/2002

AUTH App 1.22.2

The test for whether the contents of a particular website may or may not involve a financial promotion is no different to any other medium. If a website or part of a website, operated or maintained in the course of business, invites or induces a person to engage in investment activity, it will be a financial promotion. The FSA takes the view that the person who caused the website to be created will be a communicator. So, any software engineers that may or may not have been involved in establishing the website, provided they have no interest in it other than being paid for its design, will not be communicating financial promotions contained in it. Similarly, an Internet services provider who merely manages a website for another person and who has no control over or responsibility for its contents will not be communicating any financial promotion in the site. An Internet service provider whose circumstances are such that he is communicating financial promotions for other persons may be able to use the exemption for mere conduits (see AUTH App 1.12.18 G).

01/06/2002

AUTH App 1.22.3

The Internet also allows hypertext links, where two different sites in the Internet can be connected almost instantaneously by simply clicking on the link. The FSA's views on the position of hypertext links (which should be read with the remainder of AUTH App 1, especially AUTH App 1.4 (Invitation or inducement)) are as follows.

(1) A hypertext link may or may not be a financial promotion in itself. This will depend on the nature of the hypertext link and the context in which it is placed. However, taken in isolation, a hypertext link which is purely the name or logo of the destination will not be a financial promotion in its own right. More sophisticated links, such as banners or changeable text, may be financial promotions. This will depend upon the facts in each case.

(2) The material on a host website which contains the hypertext link may in itself be a financial promotion. For example, it may contain text which seeks to encourage or incite persons to activate the link with a view to engaging in investment activity.

(3) Website material which represents a directory of website addresses or e-mail addresses will not be a financial promotion in its own right. That is unless the material also contains an inducement to contact a named addressee with a view to engaging in investment activity.

(4) The destination website (that is, the one that is reached through the hypertext link) may or may not be a financial promotion. This will depend upon the content of that website. Website operators are responsible for the contents of their website if it hosts or creates links to the websites of unauthorised persons. In most cases they will not be causing the communication of any financial promotion in those other websites and so will not be responsible for those websites complying with section 21. In some cases, however, the operator ('O') of a website which hosts a link to another website, may be causing the communication of a financial promotion on that other website. This will only arise when O has made arrangements with the operator of the other website under which O is to procure users of his site to access the link provided with a view to their engaging in investment activity.

(5) An exemption may require certain indications to be made in a financial promotion on a website. In theses cases, the requirement may be satisfied by putting information on separate pages which can be accessed through a link on the page, or one of the pages, which contains the financial promotion.

01/06/2002

AUTH App 1.23

Regulated activities

01/12/2004

AUTH App 1.23.1

Under section 19 of the Act (The general prohibition) no person may, by way of business, carry on a regulated activity in the United Kingdom unless he is authorised or exempt. The meaning of regulated activity is set out in Part II of the Financial Services and Markets Act 2000 (RegulatedActivities) Order 2001 (the Regulated Activities Order) (as amended). Any person who breaches section 19 of the Act commits a criminal offence for which the maximum penalty is two years? imprisonment and an unlimited fine.

01/06/2002

AUTH App 1.23.2

Anyone who is carrying on a regulated activity is likely to make financial promotions in the course of or for the purposes of carrying on that activity. It is beyond the scope of this guidance to cover regulated activities as such (for a general guide see AUTH 2). There are circumstances, however, where persons whose main aim is either :

(1) to make financial promotions for their own purposes or on behalf of others; or

(2) to help other persons to make financial promotions,

may find themselves conducting regulated activities. Such persons may typically include publishers or broadcasters, financial commentators, Internet service providers and website operators and telephone marketing companies.

01/06/2002

AUTH App 1.23.3

The regulated activities which are likely to be conducted in the circumstances referred to in AUTH App 1.23.2 G are:

(1) giving advice on certain investments (articles 53 (Advising on investments), 53A (Advising on regulated mortgage contracts) and 56 (Advice on syndicate participation at Lloyd's) of the Regulated Activities Order) - for example, where the financial promotion is the advice;

(2) making arrangements with a view to transactions in investments (article 25(1) of the Regulated Activities Order (Arranging deals in investments)) or making arrangements with a view to regulated mortgage contracts (Article 25A(2) of the Regulated Activities Order (Arranging regulated mortgage contracts) - for example, where the person concerned makes arrangements that are intended to lead to a transaction by a third party; and

(3) agreeing to carry on either (1) or (2) (article 64 of the Regulated Activities Order (Agreeing to carry on specified kinds of activity)).

01/06/2002

AUTH App 1.24

Advising on investments

01/12/2004

AUTH App 1.24.1

Under article 53 of the Regulated Activities Order, advising on investments covers advice which:

(1) is given to a person in his capacity as an investor or potential investor, or in his capacity as agent for an investor or a potential investor; and

(2) is advice on the merits of his (whether as principal or agent) buying, selling, subscribing for or underwriting a particular investment which is a security or a relevant investment or exercising any right conferred by such an investment to buy, sell, subscribe for or underwrite such an investment.

01/06/2002

AUTH App 1.24.2

The effect of advice being given in the circumstances referred to in AUTH App 1.24.1 G is that:

(1) it must relate to an investment which is a security or a relevant investment;

(2) that investment must be a particular investment;

(3) it must be given to persons in their capacity as investors or potential investors;

(4) it must be advice (that is, not just information); and

(5) it must relate to the merits of investors or potential investors (or their agents) buying, selling, subscribing for or underwriting (or exercising rights to acquire, dispose of or underwrite) the investment.

01/06/2002

AUTH App 1.24.3

Each of the aspects referred to in AUTH App 1.24.2 G is considered in greater detail in AUTH App 1.25 to AUTH App 1.29. In addition, under article 56 of the Regulated Activities Order, advising a person to become, or continue or cease to be a member of a particular Lloyd's syndicate is a regulated activity.

01/06/2002

AUTH App 1.25

Advice must relate to an investment which is a security or contractually based investment

01/12/2004

AUTH App 1.25.1

For the purposes of section 53 of the Regulated Activities Order, a security or relevant investment is any one of the following:

(1) shares;

(2) debentures;

(3) government and public securities;

(4) warrants;

(5) certificates representing certain securities;

(6) units in collective investment schemes;

(7) stakeholder pension schemes;

(8) options;

(9) futures;

(10) contracts for differences;

(11) contracts of insurance;

(12) funeral plan contracts (with effect from 1 January 2002);

(13) rights to or interests in such investments.

01/06/2002

AUTH App 1.25.2

Article 53 does not apply to advice given on any of the following:

(1) deposit or other bank or building society accounts;

(2) interests under the trusts of an occupational pension scheme (but rights under an occupational pension scheme that is a stakeholder pension scheme will be securities).

(3) mortgages or other loans; (but note that advising on regulated mortgage contracts is a separate regulated activity under Article 53A of the Regulated Activities Order - see the guidance in AUTH App 4 (Regulated activities connected with mortgages));

(4) National Savings products;

(5) foreign exchange (or cash);

(6) commodities (for example, gold);

(7) real estate;

(8) any other physical property capable of having investment potential (for example, works of art, racehorses) unless investment is made through a collective investment scheme;

(9) [deleted]

01/06/2002

AUTH App 1.26

The investment must be a particular investment

01/12/2004

AUTH App 1.26.1

For the purposes of article 53 advice must relate to a particular investment - generic or general advice is not covered. Generic or general advice may, however, be a financial promotion (see AUTH App 1.4).

01/06/2002

AUTH App 1.26.2

Generic advice will not be caught by article 53. Examples of generic advice may include:

(1) financial planning;

(2) advice on the merits of investing in Japan rather than Europe;

(3) advice on the merits of investing in investment trusts as opposed to unit trusts or unit-linked insurance; and

(4) advice on the merits of investing offshore, or in fixed income rather than floating rate bonds.

01/06/2002

AUTH App 1.26.3

In the FSA's view, guiding a person through a decision tree should not, of itself, involve advice within the meaning of article 53 (it should be generic advice). For example, helping a person to understand what the questions or options are and how to determine which option applies to his particular circumstances. But a recommendation that the person concerned should, if the results of using the decision tree so indicate, buy a stakeholder personal pension from a particular provider (or any other particular investment) would be advice for the purpose of article 53. An unauthorised person guiding another through a decision tree needs to make it clear that the decision tree aids generic decisions and that the person doing the guiding is not recommending any particular investment.

01/06/2002

AUTH App 1.26.4

Examples of a particular investment include:

(1) securities, shares in ABC plc, Treasury 10% 2001 stock, XYZ plc warrants;

(2) units in collective investment schemes - ABC smaller companies fund, XYZ Growth Trust;

(3) exchange-traded derivatives - LME Copper Grade A 3 months, LIFFE Japanese Government bond, ABC plc traded options;

(4) contractual investments, for example, futures and other contracts having specified terms and conditions such as duration, volume, interest rate or price and which are to be entered into with a particular person;

(5) contracts of insurance which are both products and contractual investments; so a particular investment would include:

(a) the ABC Life Personal Pension or the XYZ Life Guaranteed Bond; or

(b) a contract having essential terms and provider specified - for instance, a 25-year with-profits low cost endowment contract covering husband and wife and to be issued by XYZ Life Plc.

01/06/2002

AUTH App 1.27

Advice to be given to persons in their capacity as investors (on the merits of their investing as principal or agent)

01/12/2004

AUTH App 1.27.1

For the purposes of article 53, advice must be given to or directed at someone who either holds investments or is a prospective investor (or their agent). Where the investment is a risk only contract of insurance such as house contents insurance, the policyholder or prospective policyholder is regarded as an investor.

01/06/2002

AUTH App 1.27.2

Article 53 does not apply where the advice is given to persons who receive it as:

(1) an adviser who may use it to inform advice given by him to persons for whom he does not act as agent;

(2) a journalist or broadcaster; or

(3) an employer (for example, on setting up a pension scheme).

01/06/2002

AUTH App 1.27.3

Article 53 does not apply to advice given to a person (such as an independent financial adviser) who is acting as an agent for an investor if it does not relate to a transaction into which the person is to enter as agent for the investor.

01/06/2002

AUTH App 1.27.4

Article 53 does apply where the recipient is someone who invests on behalf of other persons (whether as a principal or agent), such as:

(1) a trustee or nominee; or

(2) a discretionary fund manager; or

(3) an attorney or anyone else who enters into investment transactions as agent for investors,

where he receives the advice in that capacity.

01/06/2002

AUTH App 1.27.5

Advice will still be covered by article 53 even though it may not be given to or directed at a particular investor (for example, advice given in a periodical publication or on a website). The expression 'investor' has a broad meaning and will include institutional or professional investors.

01/06/2002

AUTH App 1.28

Advice or information

01/12/2004

AUTH App 1.28.1

In the FSA's view, advice requires an element of opinion on the part of the adviser. In effect, it is a recommendation as to a course of action. Information, on the other hand, involves statements of fact or figures.

01/06/2002

AUTH App 1.28.2

In general terms, simply giving information without making any comment or value judgement on its relevance to decisions which an investor may make is not advice.

01/06/2002

AUTH App 1.28.3

Information may often involve:

(1) listings of share and unit prices;

(2) company news or announcements;

(3) an explanation of the terms and conditions of an investment;

(4) a comparison of the benefits and risks of one investment as compared to another;

(5) league tables showing the performance of investments of a particular kind against set published criteria;

(6) details of directors' dealings in the shares of their own companies;

(7) alerting persons to the happening of certain events (for example, XYZ shares reaching a certain price).

01/06/2002

AUTH App 1.28.4

In the FSA's opinion, however, such information may take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation. For example:

(1) a person may offer to provide information on directors' dealings on the basis that, in his opinion, were directors to buy or sell investors would do well to follow suit;

(2) a person may offer to tell a client when certain shares reach a certain value (which would be advice if the person providing the information has offered to do so on the basis that the price of the shares means that it is a good time to buy or sell them); and

(3) a person may provide information on a selected, rather than balanced, basis which would tend to influence the decision of the recipient.

01/06/2002

AUTH App 1.29

Advice must relate to the merits (of buying or selling a particular investment)

01/12/2004

AUTH App 1.29.1

Advice must relate to the buying or selling of an investment ? in other words, the pros or cons of doing so.

01/06/2002

AUTH App 1.29.2

An explanation of the implications of, for example, exercising certain rights or the happening of certain events (such as death) need not involve advice on the merits of exercising those rights or on what to do following the event.

01/06/2002

AUTH App 1.29.3

Neither does advice on the merits of using a particular stockbroker or investment manager in his capacity as such amount to advice for the purpose of article 53. This is because it is not advice on the merits of buying or selling an investment.

01/10/2002

AUTH App 1.29.4

Advice in the form of rating issuers of debt securities as to the likelihood that they will be able to meet their repayment obligations need not, of itself, involve any advice on the merits of buying, selling or holding on to that issuer's stock.

01/06/2002

AUTH App 1.29.5

Without an explicit or implicit recommendation on the merits of buying or selling an investment, advice will not be covered by article 53 if it is advice on:

(1) the likely meaning of uncertain provisions in an investment agreement;

(2) how to complete an application form;

(3) the value of investments for which there is no ready market;

(4) the effect of contractual terms and their commercial consequences;

(5) how to structure a transaction to comply with regulatory, competition and taxation requirements; or

(6) terms which are commonly accepted in the market.

01/06/2002

AUTH App 1.29.6

Advice as to what might happen to the price or value of an investment if certain events were to take place, however, may be covered by article 53 in some circumstances.

01/06/2002

AUTH App 1.30

Medium used to give advice or information

01/12/2004

AUTH App 1.30.1

With the exception of periodicals, broadcasts and other news or information services (see AUTH App 1.31.2 G), the medium used to give advice should make no difference to whether or not it is caught by article 53.

01/06/2002

AUTH App 1.30.2

Advice can be provided in many ways including:

(1) face to face;

(2) orally to a group;

(3) by telephone;

(4) by correspondence (including e-mail);

(5) in a publication, broadcast or website; and

(6) through the provision of an interactive software system.

01/06/2002

AUTH App 1.30.3

Taking electronic commerce as an example, the use of electronic decision trees does not present any novel problems. The provider of the service will be giving advice for the purpose of article 53 only if the service results in something more than a generic recommendation, as with a paper version.

01/06/2002

AUTH App 1.30.4

Advice in publications, broadcasts and websites is subject to a special regime - see AUTH App 1.31.2 G and AUTH 7.

01/06/2002

AUTH App 1.30.5

Some software services involve the generation of specific buy, sell or hold signals relating to particular investments. These signals are liable, as a general rule, to be advice for the purposes of article 53 (as well as financial promotions) given by the person responsible for the provision of the software. The exception to this is where the user of the software is required to use enough control over the setting of parameters and inputting of information for the signals to be regarded as having been generated by him rather than by the software itself.

01/06/2002

AUTH App 1.31

Exclusions for advising on investments

01/12/2004

AUTH App 1.31.1

The Regulated Activities Order contains a number of exclusions which prevent certain activities from being a regulated activity.

01/06/2002

AUTH App 1.31.2

As respects article 53, the main exclusion relates to advice given in periodical publications, regularly updated news and information services and broadcasts (article 54: Advice given in newspapers etc). The exclusion applies if the principal purpose of any of these is not to give advice covered in article 53 or to lead or enable persons to acquire or dispose of securities or contractually based investments. This is explained in greater detail, together with the provisions on the granting of certificates, in AUTH 7.

01/06/2002

AUTH App 1.31.3

It is also possible for advice to be excluded if it is given by a person in the course of carrying on a profession or business (other than a regulated activity). This is if it is reasonably to be regarded as necessary for him to give the advice to provide his professional or other services and he is not separately paid for giving the advice (article 67: Activities carried on in the course of a profession or non-investment business). This could arise in the context of advice given by persons such as :

(1) a solicitor, accountant or tax adviser; or

(2) a debt counsellor; or

(3) an employment agency.

01/06/2002

AUTH App 1.31.4

For example, it may be necessary for a person referred to in AUTH App 1.31.3 G (1) or AUTH App 1.31.3 G (2) to advise a client to sell all his assets for tax, legal or debt reduction reasons. However, it may not be necessary for him to recommend selling some investments and not others. Whether or not this is the case will depend on the circumstances in which the advice is given.

01/06/2002

AUTH App 1.32

Arranging deals in investments

01/12/2004

AUTH App 1.32.1

Under article 25 of the Regulated Activities Order, arranging deals in investments covers:

(1) making arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite a particular investment which is:

(a) a security; or

(b) a relevant investment; or

(c) an investment of the kind specified by article 86, or article 89 so far as relevant to that article (Lloyd's syndicate membership and capacity and rights to or interests in such investments); or

(2) making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting investments falling within AUTH App 1.32.1 G (1) (a) to (c) (whether as principal or agent).

01/06/2002

AUTH App 1.32.2

Article 25(1) applies only where the arrangements bring about or would bring about the particular transaction in question. This is because of the exclusion in article 26. In the FSA's view, a person brings about or would bring about a transaction only if his involvement in the chain of events leading to the transaction is of enough importance that without that involvement it would not take place. The second limb (article 25(2)) is potentially much wider as it does not require that the arrangements would bring about particular transactions. It is this limb which is of potential relevance within the scope of this guidance.

01/06/2002

AUTH App 1.32.3

In the course of their business, people such as publishers or broadcasters, Internet service providers, website operators or telephone marketing companies may provide services for authorised or exempt persons or other persons (such as overseas persons) who carry on regulated activities. This does not necessarily mean that any arrangements they make with such persons will fall within the scope of article 25(2). For that to be the case, the arrangements must be made with a view to the authorised or exempt (or overseas) person or that person's customers or counter-parties or any or all of them buying or selling investments This means that a person making arrangements must take account of the purpose for which he makes them.

01/06/2002

AUTH App 1.32.4

The ordinary business of a publisher or broadcaster can involve him in publishing or broadcasting financial promotions (for example, advertisements) on behalf of authorised or exempt persons. Journalists who write about investments or financial services may promote the services of an authorised or exempt person. In the FSA's opinion, such persons would not normally be regarded as making arrangements under article 25(2). This is the case even if any arrangements they may have made may lead their readers or viewers to buy or sell ing investments in response to the promotions. In the FSA's view, the publisher or broadcaster may normally be seen to be making arrangements with a view to publishing or broadcasting promotions which may include financial promotions. The same may apply to arrangements made by Internet website operators who may allow the promotion on their site of services including financial promotions through the setting up of hypertext links or the placing of banner advertisements.

01/06/2002

AUTH App 1.32.5

The Regulated Activities Order contains an exclusion (article 27: Enabling parties to communicate) to bring a degree of certainty to this area. This applies to arrangements which might otherwise fall within article 25(2) merely because they provide the means by which one party to a transaction (or potential transaction) is able to communicate with other parties. In the FSA's view, the crucial element of the exclusion is the inclusion of the word 'merely'. So that, where a publisher, broadcaster or Internet website operator goes beyond what is necessary for him to provide his service of publishing, broadcasting or otherwise facilitating the issue of promotions, he may well bring himself within the scope of article 25(2).

01/06/2002

AUTH App 1.32.6

For example, in the FSA's view a publisher or broadcaster would be likely to be making arrangements within the meaning of article 25(2) and be unable to make use of the exclusion in article 27 if :

(1) he enters into an agreement with a provider of investment services such as a broker or product provider for the purpose of carrying their financial promotion; and

(2) as part of the arrangements, the publisher or broadcaster does one or more of the following:

(a) brands the investment service or product in his name or joint name with the broker or product provider;

(b) endorses the service, or otherwise encourages readers or viewers to respond to the promotion;

(d) holds out the service as something he has arranged for the benefit of his readers or viewers.

01/06/2002

AUTH App 1.32.7

It would also be an indicator that a publisher or broadcaster might be making arrangements falling within article 25(2) if he receives a commission or other form of reward based on the amount of regulated business done as a result of his carrying the promotion. This would be on the basis that the existence of the financial interest will inevitably have a bearing on the purpose for which the arrangements are viewed as having been made by him. However, the article 27 exclusion will apply in cases where there is such a reward provided the arrangements are made merely to allow the communication to be made.

01/06/2002

AUTH App 1.32.8

So, the same considerations are liable to apply to a website operator or an operator of a similar service (such as an intranet or closed user electronic service) who is carrying banner advertising from, or otherwise setting up links to the sites of, authorised or exempt persons.

01/06/2002

AUTH App 1.32.9

Other persons who may benefit from the exclusion in article 27 include persons who provide the means for someone to route an order to another person. A person providing such order routing services would not, in the FSA's view, be merely facilitating communication (of the orders) if he provides added value. This added value could be in the form, for example, of such things as formatted screens, audit trails, checking completeness of orders or matching orders or reconciling trades.

01/06/2002

AUTH App 1.32.10

Companies providing telephone marketing and related services to investment firms will face similar issues. If their services are entirely passive ? for example, answering telephone calls, sending out literature upon request or referring enquirers to representatives of their client ? they may simply be regarded as making arrangements with a view to their providing telephone answering services. On the other hand, where a telephone marketing company:

(1) makes proactive calls to prospective customers of its clients; or

(2) is expected proactively to raise the possibility, during a call made by the prospective customer, of a meeting with or visit by a representative of their client or of the caller being sent promotional literature,

the arrangements are liable to be made with a view to the company's client and its prospective customers buying or sellinginvestments. So such arrangements will be likely to fall within article 25(2) unless another exclusion applies (such as that for introductions - see AUTH App 1.33).

01/06/2002

AUTH App 1.32.11

The mere provision by a website operator of a bulletin board or chat room ought not to amount to making arrangements under article 25(2) unless making such arrangements is the specific purpose of the facility. However, operators of websites with such facilities will clearly need to be aware of potential implications (such as the service being used by unauthorised persons to give advice or make financial promotions or to make misleading statements with a view to manipulating market prices). They may wish to consider drawing such matters to the attention of persons who use the facility.

01/06/2002

AUTH App 1.33

Introducing

01/12/2004

AUTH App 1.33.1

As with advice, there are various exclusions in the Regulated Activities Order which take certain arrangements out of the scope of article 25. Two of these are likely to be particularly relevant to persons who are mainly concerned with making or helping others to make communications.

01/06/2002

AUTH App 1.33.2

Article 29 of the Regulated Activities Order states that certain arrangements are not covered by article 25. These are arrangements made by an unauthorised person ('A'). The arrangements must be made for or with a view to a transaction which is or is to be entered into by another person (the client) with or through an authorised person. It must also be the case that:

(1) the transaction is or will be entered into on advice given to the client by an authorised person; or

(2) it is clear, in all the circumstances, that the client, in his capacity as an investor, is not seeking and has not sought advice from A on the merits of his entering into the transaction (or, if the client has sought such advice, A has declined to give it but has recommended that the client seek such advice from an authorised person).

For article 29 to apply, it is also necessary that, in return for making the arrangements, A does not receive from any person other than the client financial reward or other advantage, for which he does not account to the client, arising out of his making the arrangements (AUTH App 1.12.11 G gives guidance on when a person will be regarded as having received reward from someone other than his client).

01/06/2002

AUTH App 1.33.3

This exclusion may apply, for example, where a website operator, without offering any advice, sets up links to the sites of investment firms but does not receive any form of payment from any of the firms for doing so.

01/06/2002

AUTH App 1.33.4

Of potentially greater significance is the exclusion in article 33 of the Regulated Activities Order which excludes arrangements where :

(1) they are arrangements under which persons will be introduced to another person;

(2) the person to whom introductions are to be made is:

(a) an authorised person; or

(b) an exempt person acting in the course of business comprising a regulated activity in relation to which he is exempt; or

(c) a person who is not unlawfully carrying on regulated activities in the United Kingdom and whose ordinary business involves him in engaging in certain activities; and

(3) the introduction is made with a view to the provision of independent advice or the independent exercise of discretion in relation to investments generally or in relation to any class of investments to which the arrangements relate.

01/06/2002

AUTH App 1.33.5

In the FSA's view, article 33 will apply, for example, where persons are finding potential customers for independent financialadvisers, advisory stockbrokers or independent investment managers. In this case, the introducer is allowed to receive a payment for making introductions. However, it will not apply where the introductions are made either to a person whose advice or management services would not be independent (for example, a productprovider such as a life office or a manager of unit trust schemes) or for the purposes of execution-only dealing.

01/06/2002

AUTH App 1.34

The business test

01/12/2004

AUTH App 1.34.1

Persons who may be carrying on theactivity of advising on investments or making arrangements with a view to transactions in investments will only require authorisation or exemption if they are carrying on those activities by way of business. This is the effect of section 22(1) of the Act. Under section 419 of the Act, the Treasury has the power, by order, to require activities which would otherwise be treated as carried on by way of business to be treated as not carried on by way of business and vice versa. The Treasury has used this power to restrict the business test when applied to regulated activities such as advising on investments or making arrangements with a view to transactions in investments to situations where a person is carrying on the business of engaging in those activities. This is the effect of article 3 of the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001.

01/06/2002

AUTH App 1.34.2

In the FSA's view, for a person to be carrying on the business of advising on investments or making arrangements with a view to transactions in investments, he will usually need to be carrying on those activities with a degree of regularity. The person will also usually need to be carrying on the activities for commercial purposes. That is to say, he will normally be expecting to gain a direct or indirect financial benefit of some kind. Activities carried on out of friendship or for altruistic purposes will not normally amount to a business. However, in the FSA's view, it is :

(1) not necessary that a person be seeking to profit from carrying on activities; for example a company set up by a number of other companies operating in a particular area to provide research may simply charge to recover its costs but may still be regarded as carrying on its activities as a business; and

(2) not necessarily the case that services provided free of charge will not amount to a business; for example, much investment advice is provided free of charge to investors but in the course of a business funded by commission payments; services (particularly advice, information or links) available on a website may also be free of charge to users of the site but be part of a business funded by advertising fees or sponsorship; and free newspapers may well represent a business for similar reasons.

01/06/2002

AUTH App 1.35

Authorisation and exemption

01/12/2004

AUTH App 1.35.1

Any person who is contemplating carrying on the regulated activities of advising on investments or making arrangements with a view to transactions in investments by way of business will need authorisation or exemption. AUTH explains about the authorisation process and the procedures for obtaining Part IV permission and for the approval of individuals. Exemption would usually be obtained by a person entering into an agreement with an authorised person under section 39 of the Act and the Financial Services and Markets Act 2000 (Appointed Representative) Regulations 2001.

01/06/2002

AUTH App 1.36

Illustrative tables

01/12/2004

Financial Promotions: flowchart

AUTH App 1.36.1

This flowchart sets out the matters which a person will need to consider to see if the restriction in section 21 of the Act applies to his communications. It is referred to in AUTH App 1.2.5 G.

01/06/2002

Controlled activities and controlled investments

AUTH App 1.36.2

This table lists the activities that are controlled activities and the investments that are controlled investments under the Financial Promotion Order. It is referred to in AUTH App 1.7.2 G

01/06/2002

AUTH App 1.36.3

Controlled activities

Accepting deposits.

Effecting and carrying out contracts of insurance.

Dealing in securities and contractually based investments.

Arranging deals in investments.

Managing investments.

Safeguarding and administering investments.

Advising on investments.

Advising on syndicate participation at Lloyd's.

Providing funeral plan contracts.

10.

Providing qualifying credit.

10A.

Arranging qualifying credit etc.

10B.

Advising on qualifying credit etc.

11.

Agreeing to do anything in 3 to 10B above.

01/10/2002

AUTH App 1.36.4

Controlled investments

12.

A deposit.

13.

Rights under a contract of insurance.

14.

Shares etc.

15.

Instruments creating or acknowledging indebtedness (referred to in the Glossary as debentures).

16.

Government and public securities.

17.

Instruments giving entitlement to investments (referred to in the Glossary as warrants).

18.

Certificates representing certain securities.

19.

Units in a collective investment scheme.

20.

Rights under a stakeholder pension scheme.

21.

Options.

22.

Futures.

23.

Contracts for differences etc.

24.

Lloyd's syndicate capacity and syndicate membership.

25.

Funeral plan contracts (with effect from a date to be announced).

26.

Agreements for qualifying credit (with effect from a date to be announced).

27.

Rights to or interests in anything falling under 12 to 25 above.

01/06/2002

Application of exemptions to forms of financial promotion

AUTH App 1.36.5

This table identifies the types of financial promotion to which each exemption in the Financial Promotions Order applies. It is referred to in AUTH App 1.11.2 G and AUTH App 1.14.1 G.

01/06/2002

AUTH App 1.36.6

Application of Exemptions to Forms of Promotions

Financial Promotion Order

Applies to

Article No.

Title and AUTH App 1 reference (where applicable)

Unsolicited real time

Solicited real time

Non-real time (solicited or unsolicited)

Communications to overseas recipients (1.12.2G)

*¹

Communications from customers and potential customers (1.12.9G)

Follow up non-real time communications and solicited real time communications (1.12.10G)

Introductions (1.12.11G)

Exempt persons (1.12.12G)

*²

*³

Generic promotions (1.12.14G and 1.21.4G)

Mere conduits (1.12.18G)

18A

Outgoing electronic commerce communications: mere conduits, caching and hosting

Investment professionals (1.12.21G and 1.21.5G)

Communications by journalists (1.12.23G)

20A

Promotion broadcast by company director etc (1.12.23G and 1.21.6G)

20B

Incoming electronic commerce communications (1.12.38G)

Deposits : non-real time communications (1.13)

Deposits : real time communications (1.13)

Relevant insurance activity : non-real time communications (1.13)

Relevant insurance activity : non-real time communications : reinsurance and large risks (1.13)

Relevant insurance activity : real time communications (1.13)

One-off non-real time communications and solicited real time communications (1.14.3G)

28A

One-off unsolicited real time communications (1.14.11G)

Communications required or authorised by enactments

Overseas communicators: solicited real time communications (1.14.15G)

Overseas communicators: non-real time communications to previously overseas customers (1.14.17G)

Overseas communicators: unsolicited real time communications to previously overseas customers (1.14.16G)

Overseas communicators: unsolicited real time communications to knowledgeable customers (1.14.16G)

Governments, central banks etc

Industrial and provident societies

Nationals of the EEA States other than United Kingdom (1.14.18G)

Financial markets

Persons in the business of placing promotional material

Joint enterprises (1.14.19G)

Participants in certain recognised collective investment schemes

Bearer instruments: promotions required or permitted by market rules (1.14.42G)

Bearer instruments: promotions to existing holders (1.14.42G)

Members and creditors of certain bodies corporate (1.14.41G and 1.21.8G)

Members and creditors of open-ended investment companies

Group companies

Qualifying credit to bodies corporate

Persons in the business of disseminating information (1.21.10G)

Certified high net worth individuals (1.14.21G)

High net worth companies, unincorporated associations etc (1.14.25G)

Sophisticated investors (1.14.27G)

Associations of high net worth or sophisticated investors (1.14.29G)

Common interest group of a company (1.14.30G)

Settlors, trustees and personal representatives

Beneficiaries of trust, will or intestacy

Communications by members of professions (1.15.1G)

55A

Non-real time communication by members of the professions. (1.15.5G)

Remedy following report by Parliamentary Commissioner for Administration

Persons placing promotional material in particular publications

Acquisition of interest in premises run by management companies

Annual accounts and directors' report (1.21.11G)

Participation in employee shares schemes

Sale of goods and supply of services

Sale of body corporate (1.14.35G)

Takeovers of relevant unlisted companies

Takeovers of relevant unlisted companies: warrants etc

Takeovers of relevant unlisted companies: application forms

Promotions required or permitted by market rules (1.21.13G)

Promotions in connection with admission to certain EEA markets (1.21.16G)

Promotions of securities already admitted to certain markets (1.21.17G)

Promotions in connection with listing applications

Promotions included in listing particulars etc

Promotions included in prospectus for public offer of unlisted securities (1.21.20G)

Material relating to prospectus for public offer of unlisted securities

Approval of communication prior to Order coming into force

*⁴

in limited circumstances only - see article 12(2) of the Financial Promotion Order

1 for the purpose of article 16 (2) only

2 for the purpose of article 16 (1) only

3 for the purpose of article 16 (1) only

4 although article 74 applies to real time communications it may be unlikely to do so in practice. This is because it relates to advertisements which are approved under section 57 of the Financial Services Act 1986 or communications approved in accordance with COB 3. Such advertisements and communications are likely to be non-real time communications.

01/06/2002

AUTH App 2

Meaning of open-ended investment company

AUTH App 2.1

Application and Purpose

01/12/2004

Application

AUTH App 2.1.1

This appendix applies to persons who need to know whether a body corporate is an open-ended investment company as defined in section 236 of the Act (Open-ended investment companies). This would mean that it is a collective investment scheme.

01/10/2002

Purpose

AUTH App 2.1.2

The purpose of this guidance is to outline the circumstances in which a body corporate will be an open-ended investment company and, in so doing, to:

(1) give an overview of the definition (see AUTH App 2.3 (The definition)) and describe its three main elements:

(a) an open-ended investment company must be a collective investment scheme (see AUTH App 2.4 (Collective investment scheme (section 235 of the Act)));

(b) it must satisfy the 'property' condition in section 236(2) of the Act (see AUTH App 2.5 (The property condition (section 236(2) of the Act))); and

(c) it must satisfy the 'investment' condition in section 236(3) of the Act (see AUTH App 2.6 (The investment condition (section 236(3) of the Act): general) to AUTH App 2.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act))); and

(2) outline the implications for a body corporate if it does, or does not, fall within the definition of an open-ended investment company (see AUTH App 2.10 (Significance of being an open-ended investment company)).

01/10/2002

Effect of guidance

AUTH App 2.1.3

This guidance is issued under section 157 of the Act (Guidance). It is designed to throw light on particular aspects of regulatory requirements, not to be an exhaustive description of a person's obligations. If a person acts in line with the guidance in the circumstances it contemplates, the FSA will proceed on the footing that the person has complied with aspects of the requirement to which the guidance relates. Rights conferred on third parties cannot be affected by guidance given by the FSA. This guidance represents the FSA's view, and does not bind the courts. For example, it would not bind the courts in relation to an action for damages brought by a private person for breach of a rule (see section 150 of the Act (Action for damages)), or in relation to the enforceability of a contract where there has been a breach of the general prohibition on carrying on a regulated activity in the United Kingdom without authorisation (see sections 26 to 29 of the Act (Enforceability of agreements)). A person may need to seek his own legal advice. Anyone reading this guidance should refer to the Act and to the various Orders that are referred to in this guidance. These should be used to find out the precise scope and effect of any particular provision referred to in this guidance.

01/10/2002

Other guidance that may be relevant

AUTH App 2.1.4

The only kind of body corporate of an open-ended kind that may currently be formed under the law of the United Kingdom is one that is authorised by the FSA. A person intending to form an open-ended body corporate that has its head office in Great Britain should refer to the Open-ended Investment Companies Regulations 2001 (SI 2001/1228). Bodies corporate formed under these Regulations are referred to in the Handbook as investment companies with variable capital (or 'ICVCs'). COLL 2 (Authorised fund applications) and CIS 16 (Application and notification) contains rules and guidance on forming such bodies corporate. The Northern Ireland Assembly was in September 2002 considering a Bill to enable the establishment of open-ended bodies corporate whose head office is in Northern Ireland.

01/04/2004

AUTH App 2.1.5

Open-ended investment companies constituted in other EEA States which are seeking to exercise rights conferred by the UCITS Directive should refer to COLL 9 (Recognised schemes) and CIS 17 (Recognised Schemes) for guidance on the requirements of section 264 of the Act (Schemes constituted in other EEA States).

01/04/2004

AUTH App 2.1.6

Electronic commerce activities carried on by, or in relation to, any open-ended investment company will be subject to the provisions of the E-Commerce Directive. Guidance on the carrying on of electronic commerce activities is contained in the E-Commerce Directive sourcebook (ECO).

01/10/2002

AUTH App 2.2

Introduction

01/12/2004

AUTH App 2.2.1

The nature of many bodies corporate means that they will, in most if not all circumstances, come within the definition of collective investment scheme in section 235(1) to (3) of the Act (Collective investment schemes). The property concerned will generally be managed as a whole under the control of the directors of the body corporate or some other person for the purpose of running its business. The idea underlying the investment is that the investors will participate in or receive profits or income arising from the operation of the body corporate's business.

01/10/2002

AUTH App 2.2.2

However, there are a number of exclusions that apply to prevent certain arrangements from being a collective investment scheme. These are in the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) (Arrangements not amounting to a collective investment scheme). The exclusion in paragraph 21 of the Schedule to that Order is of particular significance for bodies corporate. It excludes from being a collective investment scheme certain specified bodies corporate (such as building societies and friendly societies) as well as any other body corporate except a limited liability partnership or an open-ended investment company. This means that if a body corporate is an open-ended investment company it will not be excluded from the definition in section 235(1) to (3) of the Act. So it will be a collective investment scheme. Of course, it may be that other exclusions in the Schedule to the Order are available but this will depend on the circumstances of a particular body corporate (see AUTH App 2.4.5 G (Collective investment scheme (section 235 of the Act))).

01/10/2002

AUTH App 2.2.3

Certain consequences flow according to whether or not a body corporate is an open-ended investment company. Different requirements apply to the marketing of the shares or securities issued by a body corporate which is an open-ended investment company, compared with one that is not (see AUTH App 2.10.1 G to AUTH App 2.10.6 G (Marketing of shares or securities issued by a body corporate)). In addition, the regulated activities that require permission may differ (see AUTH App 2.10.7G to AUTH App 2.10.10G (Implications for regulated activities)).

01/10/2002

AUTH App 2.2.4

Guidance on the application of the definition in particular circumstances is in AUTH App 2.11 (Frequently asked questions)).

01/10/2002

AUTH App 2.3

The definition

01/12/2004

AUTH App 2.3.1

For a body corporate to be an open-ended investment company, as defined in section 236(1) of the Act:

(1) it must be a collective investment scheme;

(2) it must satisfy the property condition in section 236(2); and

(3) it must satisfy the investment condition in section 236(3).

01/10/2002

AUTH App 2.3.2

Each of these aspects of the definition is considered in greater detail in AUTH App 2.4 (Collective investment scheme (section 235 of the Act)) to AUTH App 2.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act)). Although the definition has a number of elements, the FSA considers that it requires an overall view to be taken of the body corporate. This is of particular importance in relation to the investment condition (see AUTH App 2.6.3 G and AUTH App 2.6.4 G (The investment condition (section 236(3) of the Act: general))).

01/10/2002

AUTH App 2.3.3

An open-ended investment company may be described, in general terms, as a body corporate, most or all of the shares in, or securities of, which can be realised within a reasonable period. Realisation will typically involve the redemption or repurchase of shares in, or securities of, the body corporate. This realisation must be on the basis of the value of the property that the body corporate holds (that is, the net asset value).

01/10/2002

AUTH App 2.3.4

In the FSA's view, all of the elements of the definition are clearly objective tests. In applying the definition to any particular case, a person would need to have regard to all the circumstances. This includes any changes in the way that the body corporate operates.

01/10/2002

AUTH App 2.3.5

The FSA understands that the aim of the definition in section 236 of the Act is to include any body corporate which, looked at as a whole, functions as an open-ended investment vehicle. The definition operates against a background that there is a wide range of different circumstances in which any particular body corporate can be established and operated. For example, the definition applies to bodies corporate wherever they are formed. So, in the application of the definition to different cases, the law applicable to, and the detailed corporate form of, particular bodies corporate may differ considerably.

01/10/2002

AUTH App 2.3.6

For a body corporate formed outside the United Kingdom, there is an additional issue as to how the applicable corporate law and the definition of open-ended investment company in the Act relate to one another. The FSA understands this to operate as follows. The term 'body corporate' is defined in section 417(1) of the Act (Interpretation) as including 'a body corporate constituted under the law of a country or territory outside the United Kingdom'. So, whether or not any particular overseas person is a body corporate will depend on the law applicable in the country or territory in which it is constituted. But if it is a body corporate under that law, the question whether it is an open-ended investment company is determined, as a matter of United Kingdom law, by the definition in section 236 of the Act. This is regardless of whether or not the body corporate would be considered to be open-ended under the laws of the country or territory in which it is constituted.

01/10/2002

AUTH App 2.4

Collective investment scheme (section 235 of the Act)

01/12/2004

AUTH App 2.4.1

The first element of the definition is that open-ended investment companies are a corporate form of collective investment scheme. This means that they must have the features in section 235 of the Act.

01/10/2002

AUTH App 2.4.2

Section 235(1) states that a collective investment scheme means any arrangements with respect to property of any description. The purpose or effect of the arrangements must be to enable the persons taking part in them to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. The participants must not have day-to-day control over the management of the property (section 235(2)) and the arrangements must provide:

(1) for the contributions of the participants and the profits or income to be pooled (section 235(3)(a)); or

(2) for the property to be managed as a whole by or on behalf of the operator of the scheme (section 235(3)(b)); or

(3) for both (1) and (2).

01/10/2002

AUTH App 2.4.3

In the FSA's view, it is the very existence of the body corporate that is the collective investment scheme. There are a number of statutory references that support this view. For example, it is clear that paragraph 21 of the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) (Arrangements not amounting to a collective investment scheme) is drafted on the basis that it is the body corporate itself that is (or would be) the collective investment scheme. This provision states that 'no body corporate' other than an open-ended investment company, amounts to a 'collective investment scheme'. So, any particular body corporate is either an open-ended investment company or it is not. It cannot be both at the same time, although it may change from one to the other over time (see AUTH App 2.7.5 G (The investment condition: the 'reasonable investor') for further guidance on this point).

01/10/2002

AUTH App 2.4.4

Analysing a typical corporate structure in terms of the definition of a collective investment scheme, money will be paid to the body corporate in exchange for shares or securities issued by it. The body corporate becomes the beneficial owner of that money in exchange for rights against the legal entity that is the body corporate. The body corporate then has its own duties and rights that are distinct from those of the holders of its shares or securities. Such arrangements will, in the FSA's view, qualify as arrangements of the kind described in AUTH App 2.4.2 G. The holders of the shares or securities in the body corporate do not have day-to-day control over the management of the property (as specified in section 235(2) of the Act) and the property is managed as a whole by or on behalf of the body corporate (as specified in section 235(3) of the Act).

01/10/2002

AUTH App 2.4.5

Where a body corporate does come within the definition of a collective investment scheme in section 235(1) to (3), the only relevant issue is to determine whether or not it is excluded. As AUTH App 2.2.2 G (Introduction) explains, the exclusions are in the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) (Arrangements not amounting to a collective investment scheme). If a body corporate satisfies any of the exclusions in paragraphs 1 to 20 of the Schedule to the Order it will not be a collective investment scheme. This means that it will not then be necessary to consider whether or not it is an open-ended investment company. In any other case, it will be necessary to consider whether the body corporate is an open-ended investment company to see whether the exclusion in paragraph 21 of the Schedule to the Order (Bodies corporate) for bodies corporate other than open-ended investment companies and limited liability partnerships applies.

01/10/2002

AUTH App 2.4.6

In the FSA's view, the question of what constitutes a single scheme in line with section 235(4) of the Act does not arise in relation to a body corporate. This is simply because the body corporate is itself a collective investment scheme (and so is a single scheme). Section 235(4) contemplates a 'separate' pooling of parts of the property that is subject to the arrangements referred to in section 235(1). But to analyse a body corporate in this way requires looking through its corporate personality and ignoring the legal entity that exists separately from the holders of shares or securities and their rights. As a corporate entity, it cannot be broken up into component parts in this way. This is so even though a body corporate may issue shares or securities of deferred classes or of classes carrying different rights.

01/10/2002

AUTH App 2.5

The property condition (section 236(2) of the Act)

01/12/2004

AUTH App 2.5.1

If a particular body corporate ('BC') comes within the definition of a collective investment scheme, the second element in the definition is whether the property to which the scheme relates meets the property condition. This condition is that the property must belong beneficially to, and be managed by or on behalf of, BC. In addition, BC must have as its purpose the investment of its funds to:

(1) spread investment risk; and

(2) give its members the benefit of the results of the management of those funds by or on behalf of BC.

01/10/2002

AUTH App 2.5.2

The property belonging to BC may be property of any description, including money. For example, the arrangements may relate to real estate, works of art or a particular enterprise or rural activity. It must, of course, be possible to value the property if the requirements of the investment condition concerned with the link to net asset value are to be met (see AUTH App 2.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act))).

01/10/2002

AUTH App 2.5.3

The property of the collective investment scheme must belong beneficially to BC, although the legal title to it may be held by a third party. However, the holders of shares or securities issued by BC may not have a beneficial interest in that property. In exchange for their contributions, they will only have rights against BC.

01/10/2002

AUTH App 2.5.4

The purpose of BC will need to be determined bearing in mind its constitutional instruments and any other relevant material: for example, material in a prospectus or offer document or other promotional material. The prevailing law may also be relevant.

01/10/2002

AUTH App 2.5.5

In the FSA's view, the question of whether funds are invested by BC with the aim of spreading investment risk is not affected by the levels of risk involved in particular investments. What matters for these purposes is that the aim is to spread the risk, whatever it may be. For example, the value of each of BC's investments, if taken separately, might be subject to a high level of risk. However, this would not itself result in BC failing to satisfy the property condition as long as it could be said that the range of different investments demonstrated that the aim was to spread investment risk.

01/10/2002

AUTH App 2.6

The investment condition (section 236(3) of the Act): general

01/12/2004

AUTH App 2.6.1

If BC comes within the definition of a collective investment scheme, the third element in determining whether it is an open-ended investment company is whether the 'investment condition' is satisfied. This condition is that, in relation to BC, a reasonable investor would, if he were to participate in the scheme:

(1) expect that he would be able to realise his investment in the scheme, within a period appearing to him to be reasonable; his investment would be represented, at any given time, by the value of the shares in, or securities of, BC held by him as a participant in the scheme; and

(2) be satisfied that his investment would be realised on a basis calculated wholly or mainly by reference to the value of the property for which the scheme makes arrangements.

01/10/2002

AUTH App 2.6.2

Under the investment condition, the reasonable investor is looking to satisfy two criteria. Both of these are fundamental to his decision to invest. But the thresholds referred to in AUTH App 2.6.1 G (1) and AUTH App 2.6.1 G (2) are different. In the FSA's view, a person expects something where he regards it as likely to happen or anticipates that events will turn out in a particular way. A person is satisfied of something where he has made up his mind or is persuaded that it is the case. The first of these criteria is referred to in this guidance as the 'expectation test' and the second as the 'satisfaction test'.

01/10/2002

AUTH App 2.6.3

Section 236(3) of the Act states clearly that the investment condition must be met 'in relation to BC'. In the FSA's view, this means that the investment condition should not be applied rigidly in relation to specific events such as particular issues of shares or securities or in relation to particular points in time. The requirements of the investment condition must be satisfied in relation to the overall impression of the body corporate itself, having regard to all the circumstances.

01/10/2002

AUTH App 2.6.4

In the FSA's view, and within limits, the investment condition allows for the possibility that a body corporate that is an open-ended investment company may issue shares or securities with different characteristics. Some shares or securities may clearly satisfy the condition whereas others may not. The FSA considers that a reasonable investor contemplating investment in such a body corporate may still take the view, looking at the body corporate overall, that the investment condition is satisfied. In the FSA's view, a body corporate issuing a number of different classes of shares or securities on different terms might be expected to satisfy the investment condition where the overall balance between those that do and those that do not is strongly in favour of those that do satisfy the investment condition. The FSA considers that, in any case where there is a genuine and reasonable doubt as to where the balance between the different classes lies, it is very likely that the body corporate would not be an open-ended investment company. AUTH App 2.8.8 G (Some relevant factors in applying the 'expectation test') comments further on this aspect of the investment condition in the specific context of the 'expectation test'.

01/10/2002

AUTH App 2.6.5

Certain matters are to be disregarded in determining whether the investment condition is satisfied. Section 236(4) of the Act states that, for these purposes, no account is to be taken of any actual or potential redemption or repurchase of shares or securities under:

(1) Chapter VII of Part V of the Companies Act 1985; or

(2) Chapter VII of Part VI of the Companies (Northern Ireland) Order 1986; or

(3) corresponding provisions in force in another EEA State; or

(4) provisions in force in a country or territory other than an EEA State which the Treasury has, by order, designated as corresponding provisions (no orders have yet been made).

01/10/2002

AUTH App 2.6.6

The FSA considers that the reference in AUTH App 2.6.5 G (3) to corresponding provisions in force in another EEA State will include provisions that derive from the maintenance of capital requirements of the Second Council Directive on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies (77/91/EEC).

01/10/2002

AUTH App 2.6.7

The FSA's views on the following three elements of the investment condition are explained separately:

(1) the 'reasonable investor' (see AUTH App 2.7 (The investment condition: the 'reasonable investor'));

(2) the 'expectation' test (see AUTH App 2.8 (The investment condition: the 'expectation test' (section 236(3)(a) of the Act))); and

(3) the 'satisfaction' test (see AUTH App 2.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act)).

01/10/2002

AUTH App 2.7

The investment condition: the 'reasonable investor'

01/12/2004

AUTH App 2.7.1

The investor is specifically a reasonable investor and not just a reasonable person. This simply means that the objective standard to be applied is that of the reasonable investor. In all other respects the test is the same as any other objective test applying the standards of the reasonable person.

01/10/2002

AUTH App 2.7.2

The characteristics that a reasonable investor can be expected to have will inform the use of judgment required by the 'expectation test' and the 'satisfaction test'. These tests relate to the investor's ability to realise an investment within a reasonable period and to do so on the basis of the net value of its assets. In the FSA's view, the characteristics of the reasonable investor include:

(1) sound judgment based on good sense;

(2) some knowledge of, and possibly experience in, the field of investment in property of the same kind as that in which the body corporate is to invest; and

(3) some knowledge of the characteristic features of collective investment.

Where investment in a particular body corporate is clearly targeted at investors with certain characteristics, the reasonable investor can be assumed to have those characteristics.

01/10/2002

AUTH App 2.7.3

The reasonable investor is a hypothetical investor. The implications of this are that the test does not relate to actual investment by a particular person at a particular time or in relation to a particular issue of any class of shares or securities. In the FSA's view, what underlies the test is what a reasonable investor would think he was getting into if he were contemplating investment in a particular body corporate. In addition, because the investor is hypothetical, the investment condition is capable of operating on a rolling basis over time.

01/10/2002

AUTH App 2.7.4

In practice, the assessment of the nature of a particular body corporate will have to be made by applying the definition whenever an authorised person proposes to communicate an invitation or inducement to others for them to participate in the body corporate by buying shares or securities issued by it.

01/10/2002

AUTH App 2.7.5

After an initial assessment, however, the FSA's view is that subsequent applications of the investment condition could produce a different result, but only if there is a change to the constitution or practice of the body corporate which is significant and sustained. For example, this may happen if there is a change in the body corporate's published intentions or regular practices. As the Economic Secretary to the Treasury said in parliamentary debate when commenting on the definition, "It is a test that can be applied from time to time to allow for the possibility that a closed-ended company can become open-ended and vice versa, on account of significant changes to the way in which the operation of the company and its constitution are structured and which push the company over the boundary between the two types". (Hansard HC, 5 June 2000 Col 123).

01/10/2002

AUTH App 2.7.6

Section 236(3) uses the words "the investor would, if he were to participate in the scheme". This is consistent with the fact that the reasonable investor is hypothetical. But applying the test at this early stage makes it clear that there must be objectively justifiable grounds on which the reasonable investor could base the expectation in section 236(3)(a). And on which he could be satisfied on the matters in section 236(3)(b). In the FSA's view, this requires, for example, that there must be something in the nature of the body corporate or the law applicable to it to give rise to the required expectation or on which to satisfy the investor. The established practice of the body corporate may also provide the necessary grounds.

01/10/2002

AUTH App 2.8

The investment condition : the 'expectation test' (section 236(3)(a) of the Act)

01/12/2004

AUTH App 2.8.1

The test in section 236(3)(a) of the Act is whether the reasonable investor would expect that, were he to invest, he would be in a position to realise his investment within a period appearing to him to be reasonable. In the FSA's view, this is an objective test with the appropriate objective judgment to be applied being that of the hypothetical reasonable investor with qualities such as those mentioned in AUTH App 2.7.2 G (The investment condition: the 'reasonable investor').

01/10/2002

'Realisation' of investment

AUTH App 2.8.2

In the FSA's view, the 'realisation' of an investment means converting an asset into cash or money. The FSA does not consider that 'in specie' redemptions (in the sense of exchanging shares or securities of BC with other shares or securities) will generally count as realisation. Section 236(3)(a) refers to the realisation of an investment, the investment being represented by the 'value' of shares or securities held in BC. In the FSA's view, there is no realisation of value where shares or securities are simply replaced by other shares or securities. However, an 'in specie' redemption might, in limited circumstances, satisfy the expectation test. This is where shares or securities are exchanged for other shares or securities in the same body corporate and those replacement shares or securities can be converted into cash or money within a period which, for both transactions taken together, can be said to be 'reasonable'. This involves looking through the series of transactions and considering whether their overall effect would satisfy the expectation test.

01/10/2002

AUTH App 2.8.3

The most typical means of realising BC's shares or securities will be by their being redeemed or repurchased, whether by BC or otherwise. There are, of course, other ways in which a realisation may occur. However, the FSA considers that these will often not satisfy all the elements of the definition of an open-ended investment company considered together. For example, the mere fact that shares or securities may be realised on a market will not meet the requirements of the 'satisfaction test' for the reasons given in AUTH App 2.9.4 G to AUTH App 2.9.6 G (Effect of realisation on a market).

01/10/2002

AUTH App 2.8.4

An investor in a body corporate may be able to realise part, but not all, of his investment. The FSA considers that the fact that partial realisations may take place at different times does not prevent the body corporate coming within the definition of an open-ended investment company. But, in any particular case, the 'expectation test' will only be met if the overall period for realising the whole of the investment can be considered to be reasonable. Apart from this, the simple fact that an investor has the opportunity to realise part of his investment at pre-determined times would not itself make a body corporate open-ended.

01/10/2002

Illustrations of 'expectation'

AUTH App 2.8.5

The use of an expectation test ensures that the definition of an open-ended investment company is not limited to a situation where a holder of shares in, or securities of, a body corporate has an entitlement or an option to realise his investment. It is enough if, on the facts of any particular case, the reasonable investor would expect that he would be able to realise the investment. The following are examples of circumstances in which the FSA considers that a reasonable investor may have such an expectation:

(1) where a body corporate, in practice, regularly redeems or repurchases its shares or securities;

(2) where a body corporate has a declared policy of redeeming or repurchasing its shares or securities; even if it is possible for the body corporate to change its policy, the FSA takes the view that the body corporate is open-ended unless and until it does so. In such cases it would, however, be necessary for the change of policy to be documented and for there to be a public statement or other public evidence of the change;

(3) where a body corporate makes a public announcement that it will redeem or repurchase its shares or securities on a number of pre-arranged occasions that are identified at the time of the announcement. The issue here is whether there is a demonstrable intention to redeem or repurchase the whole of a person's investment. If there is, then a body corporate may be an open-ended investment company even before it has carried out any actual redemption or repurchase. This is provided that the redemption or repurchase can take place within a reasonable period. In contrast, a body corporate that simply offers the possibility that it may, at some stage, decide to offer redemption, or partial redemption, at certain specified times would not, in the FSA's view, give rise to the expectation required by section 236(3)(a).

01/10/2002

AUTH App 2.8.6

However, a reasonable investor's expectation of being able to realise his investment is not displaced simply because, in certain circumstances, no active steps need to be taken to realise the investment. This might happen where a redemption or repurchase of shares or securities may become compulsory as a result of some aspect of the applicable law.

01/10/2002

Some relevant factors in applying the 'expectation test'

AUTH App 2.8.7

In the FSA's view, the fact that a person may invest in the period shortly before a redemption date would not cause a body corporate, that would not otherwise be regarded as such, to be open-ended. This is because the investment condition must be applied in relation to BC as a whole (see AUTH App 2.6.3 G (The investment condition (section 236(3) of the Act): general).

01/10/2002

AUTH App 2.8.8

Similarly, if BC issues shares or securities on different terms as to the period within which they are to be redeemed or repurchased (see AUTH App 2.6.4 G (The investment condition (section 236(3) of the Act): general), BC must be considered as a whole. Whether or not the expectation test is satisfied in relation to a particular body corporate is bound to involve taking account of the terms on which its shares or securities, or classes of shares or securities, are issued. But this is only one of a number of factors to be taken into account. It is subject to any indications there may be in the other relevant factors (such as those in AUTH App 2.8.9 G).

01/10/2002

AUTH App 2.8.9

As indicated in AUTH App 2.3.5 G(G) (The definition), the potential for variation in the form and operation of a body corporate is considerable. So, it is only possible in general guidance to give examples of the factors that the FSA considers may affect any particular judgment. These should be read bearing in mind any specific points considered elsewhere in the guidance. Such factors include:

(1) the terms of the body corporate's constitution;

(2) the applicable law;

(3) any public representations that have been made by or on behalf of the body corporate;

(4) the actual behaviour of the body corporate or of a person acting on its behalf in relation to investors seeking to realise their investment in it;

(5) whether investors in the body corporate are in a position to take advantage of fluctuations in property value in the particular market in which the body corporate invests;

(6) the existence of a guarantee, which may mean that a longer period may appear reasonable than would be the case without the guarantee;

(7) where the underlying property in which the body corporate invests is relatively illiquid; in this case, the period within which realisation of an investment may be regarded as reasonable may be longer than it would be for property which has greater liquidity;

(8) the levels of disclosure of the terms on which investment is made;

(9) the nature of the investment objectives or policy of the body corporate; and

(10) the appropriateness of the name of the body corporate.

01/10/2002

AUTH App 2.9

The investment condition : the 'satisfaction test' (section 236(3)(b) of the Act)

01/12/2004

AUTH App 2.9.1

The test in section 236(3)(b) of the Act is whether the reasonable investor would, before he makes a decision to invest, be satisfied that the value of his investment would be realised on a basis calculated wholly or mainly by reference to the value of the property belonging to BC.

01/10/2002

AUTH App 2.9.2

In the FSA's view, this means that the reasonable investor must be satisfied that what he will get when he realises his investment is his proportionate share in the value of BC's underlying assets, less any dealing costs. In other words, that he is satisfied he will get net asset value. The investment condition focuses on the way the body corporate operates over time, and not by reference to particular issues of shares or securities (see AUTH App 2.6.3 G (The investment condition (section 236(3) of the Act): general)). This means that this part of the investment condition looks to the general method used to calculate the value of the investment.

01/10/2002

AUTH App 2.9.3

For the 'satisfaction test' to be met, there must be objectively justifiable grounds on which the reasonable investor could form a view. He must be satisfied that the value of BC's property will be the basis of a calculation used for the whole, or substantially the whole, of his investment. The FSA considers that the circumstances, or combination of circumstances, in which a reasonable investor would be in a position to form this view include:

(1) where the basis of net asset valuation is stated in constitutional documents of BC;

(2) where there is a separate agreement or arrangement made outside BC's constitution under which a person other than BC undertakes:

(a) to redeem or repurchase any shares or securities issued by BC; or

(b) to take steps to ensure that the market value of the shares or securities reflects the value of BC' s property (see AUTH App 2.9.4 G (Effect of realisation on a market)); and

(3) where an undertaking to intervene in the market to support the price of the shares or securities at net asset value has been made publicly known by BC or by another person (see AUTH App 2.9.4 G (Effect of realisation on a market)).

01/10/2002

Effect of realisation on a market

AUTH App 2.9.4

AUTH App 2.9.3 G (2) and AUTH App 2.9.3 G (3) refer to circumstances where the reasonable investor may be satisfied that he can realise his investment at net asset value because of arrangements made to ensure that the shares or securities trade at net asset value on a market. There may, for example, be cases of market dealing where the price of shares or securities will not depend on the market. An example is where BC or a third party undertakes to ensure that the market value reflects the value of BC's property. This includes taking steps such as intervening in the market. In this case, it seems to the FSA that such an undertaking will constitute the necessary objective grounds on which an investor can be satisfied as to the basis on which the value of his investment will be realised. Unless arrangements of this kind exist, the FSA considers that the satisfaction test will not be met if the primary means for realising any investment in BC is on a market.

01/10/2002

AUTH App 2.9.5

However, where there is a market, the FSA does not consider that the test in section 236(3)(b) would be met if the price the investor receives for his investment is wholly dependent on the market rather than specifically on net asset value. In the FSA's view, typical market pricing mechanisms introduce too many uncertainties to be able to form a basis for calculating the value of an investment (linked to net asset value) of the kind contemplated by the satisfaction test. As a result, the FSA takes the view that, subject to AUTH App 2.9.4 G, market dealings or facilities relating to the shares in, or securities of, BC will generally not be relevant in assessing whether or not BC comes within the definition of an open-ended investment company.

01/10/2002

AUTH App 2.9.6

The fact that the definition must be applied to BC as a whole (see AUTH App 2.6.3 G (The investment condition (section 236(3) of the Act): general)) is also relevant here. So, for example, in a take-over situation the fact that a bidder may be willing to provide an exit route for an investment at net asset value will be irrelevant within the context of the definition. This is so even if an investor invests in particular shares or securities in the knowledge or expectation or in anticipation of such an offer being made. In the FSA's opinion, this is not a typical situation and does not affect the nature of BC as a whole or the manner in which it functions characteristically.

01/10/2002

'Wholly or mainly'

AUTH App 2.9.7

The expression 'wholly or mainly' in section 236(3)(b) determines the extent of the permissible departure from the link between the price of BC's shares or securities and the value of its net assets. The word 'mainly' introduces some flexibility to the process to allow for limited account to be taken of factors other than the value of BC's assets that may result in the sum realised failing to reflect the true net asset value. Such factors may include:

(1) the payment by the investor of charges; or

(2) the payment by the investor of an early redemption penalty; or

(3) a discount on a repayment or repurchase of the shares or securities to reflect the payment by or on behalf of BC of the charges required to fund payment from a source other than BC's assets; for example, this might be a loan that is to be repaid from BC's assets once they are available.

01/10/2002

AUTH App 2.10

Significance of being an open-ended investment company

01/12/2004

Marketing of shares or securities issued by body corporate

AUTH App 2.10.1

A number of controls apply under the Act to the promotion of shares or securities that are issued by any body corporate. These controls differ according to whether the person making the promotion is an unauthorised person (see AUTH App 2.10.2 G) or an authorised person (see AUTH App 2.10.3 G to AUTH App 2.10.6 G). In addition, where a body corporate is not an open-ended investment company:

(1) the requirements of the Public Offers of Securities Regulations 1995 will apply if its securities are offered to the public in the United Kingdom; and

(2) the listing requirements under Part VI of the Act (Official listing) will apply if its securities are to be listed.

01/10/2002

AUTH App 2.10.2

The controls under the Act that apply to promotions of shares or securities by unauthorised persons are in section 21 of the Act (Restrictions on financial promotion). These controls apply where an unauthorised person makes a financial promotion in, or from, the United Kingdom that relates to the shares in or securities of any body corporate. The same controls apply regardless of whether the shares or securities being promoted are issued by a body corporate that is an open-ended investment company or one that is not. There are a number of exemptions from the restriction in section 21 of the Act. These are explained in AUTH App 1 (Financial promotion and related activities).

01/10/2002

AUTH App 2.10.3

Promotions made by authorised persons in the United Kingdom are generally subject to the controls in COB 3 (Financial Promotion). However, in the case of shares in, or securities of, a body corporate which is an open-ended investment company, additional controls are imposed by Chapter II of Part XVII of the Act (Restrictions on promotion of collective investment schemes) (see AUTH App 1.20). Section 238 of the Act (Restrictions on promotion) prevents an authorised person communicating any invitation or inducement to buy shares or securities issued by an open-ended investment company. Section 240 of the Act (Restriction on approval of promotion) prevents an authorised person approving a financial promotion to be communicated by an unauthorised person. This is if the authorised person would not be able to promote the share or security himself.

01/10/2002

AUTH App 2.10.4

The restrictions mentioned in AUTH App 2.10.3 G are subject to a number of exemptions. For example, the controls in sections 238 and 240 do not apply to financial promotions about certain kinds of collective investment scheme. These are:

(1) open-ended investment companies formed in Great Britain and authorised by the FSA under the Open-ended Investment Companies Regulations 2001;

(2) authorised unit trust schemes; and

(3) collective investment schemes that are recognised schemes (see COLL 9 (Recognised schemes) and CIS 17 (Recognised schemes)).

The position with respect to the promotion by authorised persons of open-ended investment companies formed in Northern Ireland will be considered as part of the implementing process for the relevant Northern Ireland legislation (see AUTH App 2.1.4 G (Other guidance that may be relevant)).

01/04/2004

AUTH App 2.10.5

There are a number of other exemptions in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (SI 2001/1060). In general terms, these exemptions are equivalent to the exemptions from section 21 of the Act that apply to units. There is guidance on those exemptions in AUTH App 1.20.3 G (Additional restriction on the promotion of collective investment schemes).

01/10/2002

AUTH App 2.10.6

The FSA has also made rules under section 238(5) which allow authorised persons to communicate or approve a financial promotion for an open-ended investment company that is an unregulated collective investment scheme (that is, one that does not fall within AUTH App 2.10.4 G). The circumstances in which such a communication or approval is allowed are explained in COB 3 Annex 5 (which is introduced by COB 3.11).

01/10/2002

Implications for regulated activities

AUTH App 2.10.7

In the Regulated Activities Order, shares in or securities of an open-ended investment company are treated differently from shares in other bodies corporate. They are treated as units in a collective investment scheme under article 81 of the Regulated Activities Order (Units in a collective investment scheme) rather than shares under article 76 (Shares etc).

01/10/2002

AUTH App 2.10.8

A person who carries on in the United Kingdom the business of engaging in any regulated activity that relates to units or shares will need to be an authorised person (see AUTH 2.7 and AUTH 2.8 (Authorisation and regulated activities).

01/10/2002

AUTH App 2.10.9

In order to be authorised, a person must have permission to carry on the regulated activities in question. What the permission needs to cover may differ according to whether the regulated activity being carried on relates to units or shares. So, for example, a body corporate that is an open-ended investment company will need permission if it carries on the regulated activity of dealing as principal or agent, arranging (bringing about) or making arrangements with a view to transactions in its own shares or securities in the United Kingdom. This applies also to a body corporate that is not an open-ended investment company except that it will not need permission to issue or arrange for the issue of its own shares or securities.

01/10/2002

AUTH App 2.10.10

A person carrying on the regulated activity of establishing, operating or winding up a collective investment scheme that is constituted by an open-ended investment company will need permission for those activities. In line with section 237(2) of the Act (Other definitions), the operator of a collective investment scheme that is an open-ended investment company is the company itself. But where the open-ended investment company is incorporated outside the United Kingdom, it will only require permission if its operation takes place in the United Kingdom.

01/10/2002

AUTH App 2.11

Frequently Asked Questions

01/12/2004

AUTH App 2.11.1

There are some frequently asked questions about the application of the definition of an open-ended investment company in the following table. This table belongs to AUTH App 2.2.4 G (Introduction).

Question

Answer

Can a body corporate be both open-ended and closed-ended at the same time?

In the FSA's view, the answer to this question is 'no'. The fact that the investment condition is applied to BC (rather than to particular shares in, or securities of, BC) means that a body corporate is either an open-ended investment company as defined in section 236 of the Act or it is not. Where BC is an open-ended investment company, all of its securities would be treated as units of a collective investment scheme for the purpose of the Act. A body corporate formed in another jurisdiction may, however, be regarded as open-ended under the laws of that jurisdiction but not come within the definition of an open-ended investment company in section 236 (and vice versa).

Can an open-ended investment company become closed-ended (or a closed-ended body become open-ended)?

In the FSA's view, the answer to this question is 'yes'. A body corporate may change from open-ended to closed-ended (and vice versa) if, taking an overall view, circumstances change so that a hypothetical reasonable investor would consider that the investment condition is no longer met (or vice versa). This might happen where, for example, an open-ended investment company stops its policy of redeeming shares or securities at regular intervals (so removing the expectation that a reasonable investor would be able to realise his investment within a period appearing to him to be reasonable). See also AUTH App 2.7.5G.

Does the liquidation of a body corporate affect the assessment of whether or not the body is an open-ended investment company?

The FSA considers that the possibility that a body corporate that would otherwise be regarded as closed-ended may be wound up has no effect at all on the nature of the body corporate before the winding up. The fact that, on a winding up, the shares or securities of any investor in the body corporate may be converted into cash or money on the winding up (and so 'realised') would not, in the FSA's view, affect the outcome of applying the expectation test to the body corporate when looked at as a whole. The answer to Question 4 explains that investment in a closed-ended fixed term company shortly before its winding up does not, in the FSA's view, change the closed-ended nature of the company. For companies with no fixed term, the theoretical possibility of a winding up at some uncertain future point is not, in the FSA's view, a matter that would generally carry weight with a reasonable investor in assessing whether he could expect to be able to realise his investment within a reasonable period.

Does a fixed term closed-ended investment company become an open-ended investment company simply because the fixed term will expire?

In the FSA's view, the answer to this is 'no'. The termination of the body corporate is an event that has always been contemplated (and it will appear in the company's constitution). Even as the date of the expiry of the fixed term approaches, there is nothing about the body corporate itself that changes so as to cause a fundamental reassessment of its nature as something other than closed-ended. Addressing this very point in parliamentary debate, the Economic Secretary to the Treasury stated that the "aim and effect [of the definition] is to cover companies that look, to a reasonable investor, like open-ended investment companies". The Minister added that "A reasonable investor's overall expectations of potential investment in a company when its status with respect to the definition is being judged will determine whether it meets the definition. The matter is therefore, definitional rather than one of proximity to liquidation". (Hansard HC, 5 June 2000 col 124).

In what circumstances will a body corporate that issues a mixture of redeemable and non-redeemable shares or securities be an open-ended investment company?

In the FSA's view, the existence of non-redeemable shares or securities will not, of itself, rule out the possibility of a body corporate falling within the definition of an open-ended investment company. All the relevant circumstances will need to be considered (see AUTH App 2.6.4, AUTH App 2.8.8G and AUTH App 2.8.9G). So the following points need to be taken into account.(1) The precise terms of the issue of all the shares or securities will be relevant to the question whether the investment condition is met, as will any arrangements that may exist to allow the investor to realise his investment by other means.(2) The proportions of the different share classes will be relevant to the impression the reasonable investor forms of the body corporate. A body corporate that issues only a minimal amount of redeemable shares or securities will not, in the FSA view, be an open-ended investment company. A body corporate that issues a minimal amount of non-redeemable shares or securities will be likely to be an open-ended investment company. A body corporate that falls within the definition of an open-ended investment company is likely to have (and to be marketed as having) mainly redeemable shares or securities. However, whether or not the body corporate does fall within the definition in any particular case will be subject to any contrary indications there may be in its constitutional documents or otherwise. (3) Where shares or securities are only redeemable after the end of a stated period, this factor will make it more likely that the body corporate is open-ended than if the shares or securities are never redeemable.

Does "realised on a basis calculated wholly or mainly by reference to..." in section 236(3)(b) apply to an investor buying investment trust company shares traded on a recognised investment exchange because of usual market practice that the shares trade at a discount to asset value?

In the FSA's view, the answer is 'no' (for the reasons set out in AUTH App 2.9.4G to AUTH App 2.9.6G).

Does the practice of UK investment trust companies buying back shares result in them becoming open-ended investment companies?

In the FSA's view, it does not, because its actions will comply with company law: see section 236(4) of the Act and AUTH App 2.6.5 G.

Would a body corporate holding out redemption or repurchase of its shares or securities every six months be an open-ended investment company?

In the FSA's view a period of six months would generally be too long to be a reasonable period for a liquid securities fund. A shorter period affording more scope for an investor to take advantage of any profits caused by fluctuations in the market would be more likely to be a reasonable period for the purpose of the realisation of the investment (in the context of the 'expectation' test, see AUTH App 2.8 and, in particular, AUTH App 2.8.9G which sets out the kind of factors that may need to be considered in applying the test).

Would an initial period during which it is not possible to realise investment in a body corporate mean that the body corporate could not satisfy the investment condition?

In the FSA's view, the answer to that question is 'no'. In applying the investment condition, the body corporate must be considered as a whole (see AUTH App 2.6.3G). At the time that the shares or securities in a body corporate are issued, a reasonable investor may expect that he will be able to realise his investment within a reasonable period notwithstanding that there will first be a short-term delay before he can do so. Whether or not the 'expectation test' is satisfied will depend on all the circumstances (see AUTH App 2.8.9G).

01/10/2002

AUTH App 3

Guidance on the scope of the regulated
activity of issuing e-money

AUTH App 3.1

Application and purpose

01/12/2004

Application

AUTH App 3.1.1

This appendix applies to a person who needs to know whether a particular electronic payment product is e-money and whether the person issuing it needs to be authorised under the Act.

27/04/2002

AUTH App 3.1.2

This appendix also applies to a person who needs to know the extent to which section 21 of the Act (Restrictions on financial promotion) and COB 3 (Financial promotion) apply to e-money.

27/04/2002

Purpose

AUTH App 3.1.3

There are two main purposes of this guidance on the definition of e-money. These are:

(1) to outline the main features of the regulated activity of issuing e-money;

(2) to explain the application of the restriction on financial promotion under section 21 of the Act so far as it concerns issuing e-money.

27/04/2002

AUTH App 3.1.4

27/04/2002

AUTH App 3.1.5

Although the guidance does not bind the courts, it may be of persuasive effect for a court considering whether it would be just and equitable to allow a contract to be enforced (see sections 28(3) and 30(4) of the Act). Anyone reading this guidance should refer to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (as amended) (the Regulated Activities Order), the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002 (SI 2002/682) and to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (SI 2001/1335) (as amended) (the Financial Promotion Order). These should be used to find out the precise scope and effect of any particular provision referred to in this guidance, and any reader should consider seeking legal advice if doubt remains. If a person acts in line with the guidance in the circumstances mentioned by it, then the FSA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates.

27/04/2002

AUTH App 3.2

The regulated activity of issuing e-money

01/12/2004

The Regulated Activities Order

AUTH App 3.2.1

Under section 19 of the Act (The general prohibition), no person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is authorised or exempt under the Act.

27/04/2002

AUTH App 3.2.2

A regulated activity means an activity of a kind specified in the Regulated Activities Order which is carried on by way of business and which (generally) relates to an investment of a kind specified in the Regulated Activities Order.

27/04/2002

AUTH App 3.2.3

Further guidance on section 19 and regulated activities can be found in AUTH 2.

27/04/2002

AUTH App 3.2.4

Article 9B of the Regulated Activities Order says that issuing e-money is a specified activity of the kind described in AUTH App 3.2.2 G. Article 74A of the Regulated Activities Order says that e-money is a specified investment for that purpose.

27/04/2002

AUTH App 3.2.5

E-money is defined in Article 3(1) of the Regulated Activities Order. It says that e-money means monetary value, as represented by a claim on the issuer, which is:

(1) stored on an electronic device;

(2) issued on receipt of funds; and

(3) accepted as a means of payment by persons other than the issuer.

27/04/2002

The E-Money Directive

AUTH App 3.2.6

The E-Money Directive introduces a framework for the regulation of e-money at a European level.

27/04/2002

AUTH App 3.2.7

The Regulated Activities Order copies out the definition of electronic money in the E-Money Directive, with one exception.

27/04/2002

AUTH App 3.2.8

The exception is that the words - of an amount not less in value than the monetary value issued? in article 1(3)(b)(ii) of the E-Money Directive are not reproduced in the Regulated Activities Order.

27/04/2002

AUTH App 3.2.9

The words in article 1(3)(b)(ii) omitted from the definition in the Regulated Activities Order are aimed at stopping e-money issuers from issuing e-money at a discount. They were omitted from the Regulated Activities Order to make it clear that issuing electronic monetary value at a discount is not an unregulated activity. Instead, the prohibition on issuing e-money at a discount is left to FSA rules. The FSA rules on this are in ELM 4 (Limitations on activities).

27/04/2002

AUTH App 3.2.10

On this basis, the FSA believes that the definition of e-money in the Regulated Activities Order should be interpreted consistently with the E-Money Directive.

27/04/2002

Exclusions

AUTH App 3.2.11

Article 9C of the Regulated Activities Order says that the issuing of e-money by a person to whom the FSA has given a certificate under that article is not a regulated activity provided that the certificate has not been revoked. The FSA may only issue such certificates to small or local e-money schemes. Further guidance on this topic can be found in ELM 8 (Small e-money issuers).

27/04/2002

The issuer of e-money

AUTH App 3.2.12

As explained in AUTH App 3.2.4 G, the regulated activity relating to e-money is issuing e-money.

27/04/2002

AUTH App 3.2.13

In some e-money schemes an originator creates e-money and then sells it to banks and other distributors. The latter then sell the e-money to the public. In the FSA's view, references to the issuer of e-money in the Regulated Activities Order are to the originator and not the distributors.

27/04/2002

AUTH App 3.2.14

The issuer is the issuer of the e-money rather than the issuer of the electronic device on which it is stored, if they are different.

27/04/2002

Exclusion from the definition of deposit

AUTH App 3.2.15

Article 9A of the Regulated Activities Order says that a sum is not a deposit if it is immediately exchanged for e-money.

27/04/2002

AUTH App 3.2.16

Thus if a customer pays for e-money but the e-money is not issued until later, that initial payment will be a deposit, as long as the payment comes within the definition of deposit in the Regulated Activities Order.

27/04/2002

AUTH App 3.2.17

AUTH 2.6.2 G to AUTH 2.6.4 G has guidance on the meaning of deposit.

27/04/2002

AUTH App 3.2.18

Some e-money products may be charged up by means of scratch cards that can be purchased from shops. The price paid for the card is the monetary value of the e-money. The card contains a number. The purchaser then enters the number on a web site to activate the e-money account. There is thus a delay between the payment for the e-money and its use by the holder. Such a delay does not make the payment for the e-money a deposit. This is because the means of spending the e-money is put into the hands of the purchaser when he purchases the card.

27/04/2002

AUTH App 3.2.19

A person may also pay for e-money by cheque. The e-money issuer will not receive the value until the cheque has cleared. This delay does not make the payment for the e-money into a deposit. The purchaser has paid for the e-money, even though his payment obligation has only been satisfied conditionally.

27/04/2002

Transitionals

AUTH App 3.2.20

Article 9 of The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002 has transitional provisions relating to those who were issuing e-money on 27 April 2002.

27/04/2002

AUTH App 3.2.21

Where, immediately before 27 April 2002, a full credit institution with Part IV permission to accept deposits was carrying on by way of business in the United Kingdom the activity of issuing e-money, its permission is to be treated as including, for a period of six months beginning at 27 April 2002, permission to carry on the activity of issuing e-money.

27/04/2002

AUTH App 3.2.22

Where, immediately before 27 April 2002:
a) an EEA firm of the kind mentioned in paragraph 5(b) or (c) of Schedule 3 to the Act qualified for authorisation under that Schedule; and
b) the activities which were treated as permitted activities for the purposes of paragraph 13 or 14 of that Schedule as it applied to that person included issuing e-money; the firm's permission under paragraph 15 of that Schedule is to be treated as including permission to carry on that activity.

27/04/2002

AUTH App 3.2.23

The transitional provisions also apply to a body corporate or partnership which, immediately before 27 April 2002:

(1) has its head office in the United Kingdom, and is carrying on by way of business in the United Kingdom the activity of issuing e-money; or

(2) has its head office in an EEA State other than the United Kingdom, and is carrying on such an activity by way of business in the United Kingdom without contravening the law of that other EEA State.

27/04/2002

AUTH App 3.2.24

AUTH App 3.2.23 G does not include a person within AUTH App 3.2.21 G or AUTH App 3.2.22 G.

27/04/2002

AUTH App 3.2.25

A person described in AUTH App 3.2.23 G is not to be treated as carrying on the regulated activity of issuing e-money until the beginning of 27 October 2002, unless it receives permission to carry on that activity before then.

27/04/2002

AUTH App 3.2.26

On and after 27 October 2002, an e-money issuer with its head office in the United Kingdom will not be able to continue issuing e-money in the UK (or other EEA States) unless it has been granted permission under Part IV of the Act (or its existing permission has been varied to include the activity of issuing e-money). Similarly, an e-money issuer whose head office is in another EEA State will not have permission to carry on that activity on or after 27 October unless it has been duly authorised in its Home State.

27/04/2002

AUTH App 3.2.27

However, if an e-money issuer falling under AUTH App 3.2.23 G (1) that was issuing e-money as at 27 April 2002 continues to issue e-money after the beginning of 27th October 2002, its carrying on that activity after that date will continue to be excluded from the regulated activity of issuing e-money, provided that he has made an application before 27th June 2002 under section 40 of the Act (Application for permission) for permission to carry on that activity, and has not withdrawn it. That exclusion ends when the application has been finally determined.

27/04/2002

AUTH App 3.2.28

For these purposes an application is to be treated as finally determined:

(1) In a case where the FSA gives permission to carry on the activity and does not exercise its power under section 42(7)(a) or (b) (Permission) or section 43(1) (Imposition of requirements) of the Act, on the date on which the permission takes effect;

(2) In a case where the FSA refuses permission, or gives permission but exercises its power under section 42(7)(a) or (b) or section 43 of the Act, at the time when the matter ceases to be open to review (within the meaning of section 391(8) of the Act) (Publication).

27/04/2002

AUTH App 3.2.29

The transitional exclusions described in AUTH App 3.2.23 G to AUTH App 3.2.28 G do not cover an e-money issuer whose head office is outside the EEA.

27/04/2002

AUTH App 3.3

Elements of the definition of e-money

01/12/2004

Monetary value

AUTH App 3.3.1

The definition of e-money says that for a product to be e-money, it must be monetary value as represented by a claim on the issuer. Guidance on the meaning of issuer can be found at AUTH App 3.2.12 G to AUTH App 3.2.14 G

27/04/2002

Storage on an electronic device

AUTH App 3.3.2

The definition of e-money says that for a product to be e-money, it must be stored on an electronic device.

27/04/2002

AUTH App 3.3.3

E-money is an electronic payment product. The value is held electronically and payments using the value are made electronically.

27/04/2002

AUTH App 3.3.4

The fact that the device may be magnetic does not stop it being an electronic device for the purpose of the definition of e-money. Thus for example value stored on a personal computer does not fall outside the definition merely because it is stored on the computer's magnetic hard disk. Similarly, value stored on a plastic card that uses magnetic stripe technology may also fall within the definition if the value is transferred for spending using electronic technology.

27/04/2002

Prepayment

AUTH App 3.3.5

The definition of e-money says that for a product to be e-money, it must be issued on receipt of funds.

27/04/2002

AUTH App 3.3.6

This part of the definition means that e-money is a prepaid product. That is, unlike credit provided through a credit card, the customer pays for the spending power in advance. This is why credit cards are excluded from the definition of e-money.

27/04/2002

AUTH App 3.3.7

This does not mean that e-money paid for with a credit card falls outside the definition. The purchase of the e-money represents the purchase of monetary value. The fact that the purchaser is lent the funds to buy the e-money does not affect this. There are two contracts, one for the sale of e-money and one for credit.

27/04/2002

AUTH App 3.3.8

Value on a debit card may be e-money or a deposit. Guidance on this is given in AUTH App 3.3.14 G to AUTH App 3.3.20 G.

27/04/2002

AUTH App 3.3.9

The fact that the device on which monetary value is stored is made available on a plastic card that also functions as a debit or credit card does not stop that monetary value from being e-money.

27/04/2002

Multipurpose

AUTH App 3.3.10

For a product to be e-money, persons other than the issuer must accept it as a means of payment.

27/04/2002

AUTH App 3.3.11

AUTH App 3.3.10 G means that the e-money holder must be able to use it to buy goods and services from persons other than the issuer.

27/04/2002

AUTH App 3.3.12

Thus, for example, electronic value issued by an employer to its employees that can only be used to buy food and drink from the employer in its canteen is not e-money.

27/04/2002

AUTH App 3.3.13

If monetary value can be spent with third parties, it does not stop being e-money just because the e-money can also be spent with the issuer.

27/04/2002

Accounted e-money schemes

AUTH App 3.3.14

An electronic payment scheme that involves prepaid monetary value that can be spent without the involvement of the issuer is likely to be e-money. However, a product does not cease to be e-money merely because the scheme is account based.

27/04/2002

AUTH App 3.3.15

The document published by HM Treasury in March 2002 called "Implementation of the Electronic Money Directive: A Response to Consultation" says:"An important issue that respondents [to HM Treasury's consultation on the implementation of the E-Money Directive] requested clarification on was whether the Directive's definition should catch account-based schemes (i.e. e-money held remote from the owner and spent at the owner's direction) as well as, for example, card-based schemes (i.e. e-money in the possession of the owner, whether stored on a personal computer or a smart card, and directly spent by them). The Treasury believes that the Directive's definition does allow for the possibility of account-based schemes being e-money. Not allowing account-based e-money schemes would effectively create a regulatory gap between the e-money and deposit-taking regimes - and a difference of treatment between schemes that pose similar regulatory risks. Rather than attempting to amend the definition in the Order (which is already expressed suitably widely), the Treasury has clarified in the accompanying Explanatory Memorandum that the definition of e-money is to be interpreted as covering account-based schemes (so long as they remain distinct from deposit-taking)."

27/04/2002

AUTH App 3.3.16

That explanatory memorandum says:"The Treasury believes the Directive's definition includes both e-money schemes in which value is stored on a card that is used by the bearer to make purchases, and account-based e-money schemes where value is stored in an electronic account that the user can access remotely."

27/04/2002

AUTH App 3.3.17

Thus monetary value issued under an account-based scheme can be e-money. On the other hand, not all monetary value recorded electronically on an account will be e-money. If all such monetary value were e-money, any deposit recorded in records maintained electronically could be e-money, thereby turning most conventional bank accounts into e-money. Thus it is necessary to distinguish between an account-based e-money scheme and a conventional bank deposit.

27/04/2002

AUTH App 3.3.18

Recital (3) to the E-Money Directive says that "electronic money can be considered an electronic surrogate for coins and banknotes, which is stored on an electronic device such as a chip card or computer memory and which is generally intended for the purpose of effecting electronic payments of limited amounts."

27/04/2002

AUTH App 3.3.19

The European Commission published an explanatory memorandum along with its proposal for a Directive about e-money. It said that it is appropriate to emphasise that e-money does not represent a deposit. Unlike a depositor, a user does not advance funds to an issuer in order to ensure their safe keeping and handling. Neither the issuer nor the customer pursues this objective. The Commission said that the underlying contract between the customer and the issuer is that the user will get value for the e-money from those merchants that accept it and that the issuer will honour his commitment to give value.

27/04/2002

AUTH App 3.3.20

In distinguishing e-money and deposits, relevant factors include the following.

(1) As explained in AUTH App 3.3.3 G, e-money is a purely electronic product. If the monetary value is kept on an account that can be used by non-electronic means, that points towards it being a deposit. For example, an account on which cheques can be drawn is unlikely to be e-money.

(2) If a product is designed in such a way that it is only likely to be used for making payments of limited amounts and not as a means of saving, that feature points towards it being e-money. Relevant features might include how long value is allowed to remain on the account, disincentives to keeping value on the account and the payment of interest on it.

(3) If an account has features on it in addition to those necessary for a pure payment facility, such as an overdraft or direct debit facility, that points towards it not being e-money.

(4) One should have regard to whether the product is sold as e-money or as a deposit.

27/04/2002

AUTH App 3.3.21

In other words, a deposit involves the creation of a debtor-creditor relationship under which the person who accepts the deposit stores value for eventual return. E-money, in contrast, involves the purchase of a means of payment.

27/04/2002

AUTH App 3.4

Financial promotion

01/12/2004

AUTH App 3.4.1

Guidance on the restrictions on financial promotion under section 21 of the Act (Restrictions on financial promotion) can be found in AUTH App [to be added to the Handbook at a later date]. AUTH App 3.4 gives further guidance on its application to e-money.

27/04/2002

AUTH App 3.4.2

As explained in AUTH App [ ], section 21 of the Act applies to the communication of an invitation or inducement to engage in investment activity. Section 21(8) defines engaging in investment activity as:

(1) entering or offering to enter into an agreement the making or performance of which by either party constitutes a controlled activity; or

(2) exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.

27/04/2002

AUTH App 3.4.3

Controlled activity and controlled investment are both defined by reference to Schedule 1 to the Financial Promotion Order. Issuing e-money is not included as a controlled activity and e-money is not included as a controlled investment.

27/04/2002

AUTH App 3.4.4

Accepting deposits is however a controlled activity and a deposit is a controlled investment. As explained in AUTH App 3.2.15 G, the definition of deposit under the Regulated Activities Order says that a sum is not a deposit for the purposes of the Regulated Activities Order if it is immediately exchanged for e-money.

27/04/2002

AUTH App 3.4.5

The definition of deposit in the Financial Promotion Order follows the definition of deposit in the Regulated Activities Order. Therefore the purchase price paid for e-money is not a deposit for the purposes of the Financial Promotion Order.

27/04/2002

AUTH App 3.4.6

Hence the provisions in the Act and the Handbook about financial promotions do not apply to e-money.

27/04/2002

AUTH App 3.4.7

However, if the purchase price for e-money is not immediately exchanged for e-money, the purchase price may be a deposit if the payment comes within the definition of deposit in the Regulated Activities Order. AUTH 2.6.2 G to AUTH 2.6.4 G has guidance on the meaning of deposit. In such a case, the provisions in the Act and the Handbook about financial promotions relating to deposits apply.

27/04/2002

AUTH App 4

Guidance on regulated activities connected with mortgages

AUTH App 4.1

Application and purpose

01/12/2004

Application

AUTH App 4.1.1

This appendix applies to any person who needs to know whether the activities he conducts in relation to mortgages are subject to FSA regulation.

31/10/2004

Purpose of guidance

AUTH App 4.1.2

With effect from 31 October 2004 certain activities relating to mortgages will be regulated by the FSA for the first time. The purpose of this guidance is to help persons decide whether they need authorisation and, if they do, to determine the scope of the Part IV permission for which they will need to apply.

31/10/2004

Effect of guidance

AUTH App 4.1.3

31/10/2004

AUTH App 4.1.4

Rights conferred on third parties cannot be affected by guidance given by the FSA. This guidance represents the FSA's view, and does not bind the courts, for example, in relation to an action for damages brought by a private person for breach of a rule (see section 150 of the Act (Action for damages)), or in relation to the enforceability of a contract where there has been a breach of the general prohibition on carrying on a regulated activity in the United Kingdom without authorisation (see sections 26 to 29 of the Act (Enforceability of agreements)). A person may need to seek his own legal advice.

31/10/2004

AUTH App 4.1.5

Anyone reading this guidance should refer to the Act and to the various Orders that are referred to in this guidance. These should be used to find out the precise scope and effect of any particular provision referred to in this guidance.

31/10/2004

Guidance on other activities

AUTH App 4.1.6

A person may be intending to carry on activities related to other forms of investment in connection with mortgages, such as advising on and arranging an endowment policy or ISA to repay an interest-only mortgage. Such a person should also consult the guidance in AUTH 2 (Authorisation and regulated activities) and AUTH App 1 (Financial promotion and related activities), and AUTH App 5 (Mediation of general and pure protection insurance).

31/10/2004

AUTH App 4.2

Introduction

01/12/2004

Requirement for authorisation or exemption

AUTH App 4.2.1

In most cases, any person who carries on a regulated activity in the United Kingdom by way of business must either be an authorised person or an exempt person. Otherwise, the person commits a criminal offence and certain agreements may be unenforceable. AUTH 2.2 (Introduction) contains further guidance on these consequences. In order to be authorised, a person must either:

(1) hold a Part IV permission given by the FSA (see AUTH 1.3 (The Authorisation manual) and AUTH 3 (Applications for Part IV permission)); or

(2) qualify for authorisation (see AUTH 5 (Qualifying for authorisation under the Act)), for example if the person is an EEA firm or a Treaty firm.

31/10/2004

Professional firms

AUTH App 4.2.2

Certain professional firms are allowed to carry on some regulated activities without authorisation so long as they comply with specified conditions (see AUTH App 4.14 (Mortgage activities carried on by professional firms)).

31/10/2004

Questions to be considered to decide if authorisation is required

AUTH App 4.2.3

A person who is concerned to know whether his proposed activities may require authorisation will need to consider the following questions (these questions are a summary of the issues to be considered and have been reproduced, in slightly fuller form, in the flowchart in AUTH App 4.18):

(1) will I be carrying on my activities by way of business (see AUTH App 4.3.3 G (The business test))?

(2) if so, will my activities relate to regulated mortgage contracts (see AUTH App 4.4 (What is a regulated mortgage contract?))?

(3) if so, will I be carrying on any of the regulated mortgage activities (see AUTH App 4.5 (Arranging regulated mortgage contracts) to AUTH App 4.9 (Agreeing to carry on a regulated activity))?

(4) if so, is there the necessary link with the United Kingdom (see AUTH App 4.11 (Link between activities and the United Kingdom))?

(5) if so, will any or all of my activities be excluded (see AUTH App 4.5 (Arranging regulated mortgage contracts) to AUTH App 4.10 (Exclusions applying to more than one regulated activity))?

(6) if it is not the case that all of my activities are excluded, am I a professional firm whose activities are exempted under Part XX of the Act (see AUTH App 4.14 (Mortgage activities carried on by professional firms))?

(7) if not, am I exempt as an appointed representative (see AUTH App 4.12 (Appointed representatives))?

(8) if not, am I otherwise an exempt person (see AUTH App 4.13 (Other exemptions))?

If a person gets as far as question (8) and the answer to that question is 'no', that person requires authorisation and should refer to AUTH 3 (Applications for Part IV permission).

31/10/2004

AUTH App 4.2.4

Even if the person does not require authorisation, he may still require a licence under the Consumer Credit Act 1974 to carry on the activity (see AUTH App 4.17 (Interaction with the Consumer Credit Act 1974)).

31/10/2004

Financial promotion

AUTH App 4.2.5

An unauthorised person who intends to carry on activities connected with mortgages will also need to comply with section 21 of the Act (Restrictions on financial promotion). This appendix does not cover financial promotions that relate to mortgages. Persons should refer to the general guidance on financial promotion in Appendix 1 to the Authorisation manual (AUTH App 1 (Financial promotion and related activities)) and, in particular, to AUTH App 1.17 (Financial promotions concerning agreements for qualifying credit).

31/10/2004

AUTH App 4.3

Regulated activities related to mortgages

01/12/2004

AUTH App 4.3.1

There are six regulated mortgage activities requiring authorisation or exemption if they are carried on in the United Kingdom. These are set out in the Regulated Activities Order. They are:

(1) arranging (bringing about) regulated mortgage contracts (article 25A(1) (Arranging regulated mortgage contracts));

(2) making arrangements with a view to regulated mortgage contracts (article 25A(2) (Arranging regulated mortgage contracts));

(3) advising on regulated mortgage contracts (article 53A (Advising on regulated mortgage contracts));

(4) entering into a regulated mortgage contract as lender (article 61(1) (Regulated mortgage contracts));

(5) administering a regulated mortgage contract where that contract is entered into by way of business on or after 31 October 2004 (article 61(2) (Regulated mortgage contracts)); and

(6) agreeing to carry on any of the above (article 64 (Agreeing to carry on specified kinds of activity)).

31/10/2004

AUTH App 4.3.2

The scope of these activities is limited by certain exclusions contained in Parts II and III of the Regulated Activities Order. These exclusions are referred to in AUTH App 4.5 (Arranging regulated mortgage contracts) to AUTH App 4.10 (Exclusions applying to more than one regulated activity).

31/10/2004

The business test

AUTH App 4.3.3

A person will only need authorisation or exemption if he is carrying on a regulated activity'by way of business' (see section 22 of the Act (Regulated activities)). There are, in fact, three different forms of business test applied to the regulated mortgage activities. In the FSA's view, however, the difference in the business tests should have little practical effect.

31/10/2004

AUTH App 4.3.4

There is power in the Act for the Treasury to change the meaning of the business test by including or excluding certain things. The Business Order has been made using this power (partly reflecting differences in the nature of the different activities). The result (which is summarised in AUTH App 4.3.5 G) is that:

(1) the 'by way of business' test in section 22 of the Act applies unchanged in relation to the activity of entering into a regulated mortgage contract;

(2) the 'by way of business' test in section 22 of the Act applies unchanged in relation to the activity of administering a regulated mortgage contract, but another 'by way of business' test arises because the By way of business contract being administered by way of business must itself have been entered into by way of business (see AUTH App 4.8.2 G); and

(3) in the case of arranging and advising, the effect of article 3A of the Business Order (Arranging and advising on regulated mortgage contracts) is that a person is not to be regarded as acting 'by way of business' unless he is 'carrying on the business of engaging in one or more of those activities'.

31/10/2004

AUTH App 4.3.5

Summary of which variant of the business test applies to the different regulated mortgage activities.

This table belongs to AUTH App 4.3.4 G

By way of business

Carrying on the business

Entering into a regulated mortgage contract (article 61(1))
Administering a regulated mortgage contract (article 61(2)) (and the contract administered must have been entered into by way of business)

Arranging (bringing about) regulated mortgage contracts (article 25A(1))
Making arrangements with a view to regulated mortgage contracts (article 25A(2))
Advising on regulated mortgage contracts (article 53A)

31/10/2004

AUTH App 4.3.6

The 'carrying on the business' test in the Business Order is a narrower test than that of carrying on regulated activities'by way of business' in section 22 of the Act as it requires the regulated activities to represent the carrying on of a business in their own right. Whether or not the business test is satisfied in any particular case is ultimately a question of judgement that takes account of a number of factors (none of which is likely to be conclusive). The nature of the particular regulated activity that is carried on will also be relevant to the factual analysis. The relevant factors include:

(1) the degree of continuity:

(2) the existence of a commercial element; and

(3) the scale of the activity and, for the 'by way of business' test, the proportion which the activity bears to the other activities carried on by the same person but which are not regulated.

In the case of the 'carrying on the business' test, these factors will need to be considered having regard to all the activities together.

31/10/2004

AUTH App 4.3.7

The main factor that might cause an activity to satisfy the 'by way of business' test in section 22 but not the narrower 'carrying on the business' test in the Business Order is that of frequency or regularity. As a general rule, the activity would need to be undertaken with some degree of frequency or regularity to satisfy the narrower 'carrying on the business' test. Conversely, the 'by way of business' test in section 22 could be satisfied by an activity undertaken on an isolated occasion (provided that the activity would be regarded as done by 'way of business' in all other respects).

31/10/2004

AUTH App 4.3.8

It follows that whether or not any particular person may be carrying on a regulated mortgage activity'by way of business' will depend on his individual circumstances. However, some typical examples where the applicable business test would be likely to be satisfied are where a person:

(1) enters into one or more regulated mortgage contracts as lender in the expectation of receiving interest or another form of payment that would enable him to profit from his actions;

(2) administers a regulated mortgage contract in return for a payment of some kind (whether in cash or in kind); and

(3) arranges or advises on regulated mortgage contracts, or does both, on a regular basis and receives payment of some kind (whether in cash or in kind and whether from the borrower or from some other person).

31/10/2004

AUTH App 4.3.9

Some typical examples where the business test is unlikely to be satisfied are:

(1) when an individual enters into or administers a one-off mortgage securing a loan to a friend or member of his family whether at market interest rates or not;

(2) when a person provides a service without any expectation of reward or payment of any kind, such as advice given or arrangements made by many Citizens Advice Bureaux and other voluntary sector agencies (but see AUTH App 4.3.8 G (3) where payment is received for advice).

31/10/2004

AUTH App 4.4

What is a regulated mortgage contract?

01/12/2004

The definition of "regulated mortgage contract"

AUTH App 4.4.1

Article 61(3)(a) of the Regulated Activities Order defines a regulated mortgage contract as a contract which, at the time it is entered into, satisfies the following conditions:

(1) the contract is one where a lender provides credit to an individual or trustees (the 'borrower');

(2) the contract provides for the obligation of the borrower to repay to be secured by a first legal mortgage on land (other than timeshare accommodation) in the United Kingdom; and

AUTH App 4.4.2 G to AUTH App 4.4.9 G set out the FSA's understanding of some key concepts contained in Article 61(3)(a).

31/10/2004

Which borrowers?

AUTH App 4.4.2

The condition set out in AUTH App 4.4.1 G (1) limits the range of borrowers to whom the protections of the mortgage regulation regime apply to individuals and trustees. If a company (which is not acting as a trustee) borrows money for the purpose of funding the company's business, and the loan is secured by a mortgage over the company's property, the mortgage contract is not a regulated mortgage contract. So a lender will not carry on a regulated activity by entering into that contract, nor will the lender carry on a regulated activity if it advises on, arranges or administers that contract. However, if the lender makes a loan for business purposes to an individual sole trader, or (in England and Wales) a partnership, and the loan is secured on the borrower's house or houses, the contract will be a regulated mortgage contract.

31/10/2004

Date the contract is entered into

AUTH App 4.4.3

In order to meet the definition of a regulated mortgage contract, a mortgage contract must meet the conditions set out in AUTH App 4.4.1 G (1) to AUTH App 4.4.1 G (3) at the time it was entered into. The effect is that contracts which meet those conditions at that time remain regulated mortgage contracts throughout their remaining term, even if there are periods of time when some or all of the conditions are not satisfied. Conversely, contracts that do not start out as regulated mortgage contracts cannot subsequently become so, even if they later meet all the conditions set out in AUTH App 4.4.1 G (1) to AUTH App 4.4.1 G (3). A person that only administers mortgage contracts which did not meet those conditions at the time they were entered into will not, therefore, need permission to administer regulated mortgage contracts.

31/10/2004

AUTH App 4.4.4

There may, however, be instances where an existing contract, which was not a regulated mortgage contract at the time it was entered into, is replaced as a result of a variation (whether the variation is initiated by the customer or by the lender), and the new contract qualifies as a regulated mortgage contract. A person may therefore need to consider this possibility (which could affect contracts initially entered into before 31 October 2004 as well as subsequent loans) when deciding whether he needs permission to carry on any of the regulated mortgage activities.

31/10/2004

Land in the United Kingdom

AUTH App 4.4.5

The condition set out in AUTH App 4.4.1 G (2) means that a regulated mortgage contract must be secured on land in the United Kingdom. Contracts which involve taking security over moveable property therefore cannot be regulated mortgage contracts. So a contract secured on a caravan will not be a regulated mortgage contract, unless the contract also involves a mortgage over the land on which the caravan stands.

31/10/2004

Occupancy requirement

AUTH App 4.4.6

The condition set out in AUTH App 4.4.1 G (3) means that loans secured on property which is entirely used for business purposes (such as an office block) cannot fall within the definition. However, loans secured on 'mixed use' property could be covered, provided that the borrower (or trust beneficiary, where the borrowers are trustees) or a 'related person' uses at least 40% of the total of the land as or in connection with a dwelling. Loans secured on a six-floor property, half of which was occupied by the borrower and half let out for business purposes would therefore satisfy the definition. (Article 61(4)(b) makes it clear that 'land', in the context of a multi-storey building, means the aggregate of the floor area of each of the storeys.)

31/10/2004

AUTH App 4.4.7

The expression 'as or in connection with a dwelling' set out in AUTH App 4.4.1 G (3) means that loans to buy a small house with a large garden would in general be covered. However, if at the time of entering into the contract the intention was for the garden to be used for some other purpose - for example, if it was intended that a third party were to have the use of the garden - the contract would not constitute a regulated mortgage contract. Furthermore, the FSA would not regard a loan to purchase farmland and a farmhouse as constituting a regulated mortgage contract (where the farmhouse and garden amount to less than 40% of the land area), since it does not appear that the land could properly be said to be used 'in connection with' the farmhouse. The presence of the farmhouse is unconnected with the use to which the farmland is put (in contrast to a residential property's garden, which would have no existence independent of the property).

31/10/2004

AUTH App 4.4.8

The requirement that at least 40% of the land area be used as or in connection with a dwelling means that 'buy to let' loans secured on the property to be let will usually be excluded. However, such loans will not be excluded if:

(1) the lessee is a 'related person' to the borrower. Even if the borrower subsequently takes possession of the property, the loan will still not become a regulated mortgage contract, as the conditions set out in AUTH App 4.4.1 G (1) to AUTH App 4.4.1 G (3) were not satisfied at the outset of the contract (see AUTH App 4.4.3 G); or

(2) at the time the contract is entered into, the borrower has a real intention to use the land as, or in connection with, a dwelling (for example a member of the British Forces Posted Overseas who buys a property in the United Kingdom intending to live there on his return but which he lets out in the meantime).

31/10/2004

AUTH App 4.4.9

'Related person' is defined in article 61(4)(c) of the Regulated Activities Order as meaning the borrower's spouse, parents, grandparents, siblings, children and grandchildren. An unmarried partner of the borrower whose relationship with the borrower has the characteristics of the relationship between a husband and wife is also included; this can include a person of the same sex as the borrower. Stepchildren, however, would seem to be excluded.

31/10/2004

Purpose of the loan is irrelevant

AUTH App 4.4.10

The definition of regulated mortgage contract contains no reference to the purpose for which the loan is being made. So, in addition to loans made to individuals to purchase residential property, the definition is wide enough to cover other loans secured on land, such as loans to consolidate debts, or to enable the borrower to purchase other goods and services.

31/10/2004

Type of lending

AUTH App 4.4.11

The definition of regulated mortgage contract also covers a variety of types of product. Apart from the normal mortgage loan for the purchase of property, the definition also includes other types of secured loan, such as a secured overdraft facility, a secured bridging loan, a secured credit card facility, and so-called 'equity release loans' (defined as regulated lifetime mortgage contracts in this guidance) under which the borrower (usually an older person) takes out a loan where repayment of the capital (and in some cases the interest) is not required until the property is sold, usually on the death of the borrower.

31/10/2004

AUTH App 4.4.12

A number of products, however, are excluded from the definition, such as:

(1) loans secured by a second or subsequent charge (as the lender does not have a first charge);

(2) loans secured on commercial premises (as the borrower will not be using the land as or in connection with a dwelling);

(3) so-called 'home reversion schemes', under which a property owner (usually an older person) sells some or all of his interest in the property in return for a lump sum (usually a proportion of the value of the property sold) and a right to reside at the property for the rest of his life. (It should be noted, however, that the Treasury announced in May 2004 that 'home reversion schemes' are to be regulated by the FSA and that it would be introducing legislation to this effect.)

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Regulated mortgage contracts and contract variations

AUTH App 4.4.13

The effect of the Regulated Activities Order is that mortgage contracts which are varied can fall into one of the following categories:

(1) a contract that was entered into before 31 October 2004, and that is subsequently varied on or after that date so that it satisfies the conditions set out in AUTH App 4.4.1 G (1) to AUTH App 4.4.1 G (3), will not be a regulated mortgage contract (because it was not a regulated mortgage contract at the time it was entered into);

(2) a contract that was originally entered into before 31 October 2004, but is subsequently changed on or after that date such that a new contract is entered into, will be a regulated mortgage contract (provided, of course, that it meets the definition in the Regulated Activities Order); and

(3) a regulated mortgage contract that was originally entered into on or after 31 October 2004, and which is subsequently varied by, for example, making a further advance, will remain a regulated mortgage contract.

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AUTH App 4.4.14

It is possible for more than one mortgage contract to be secured by the same (first) charge. The first contract might be entered into before 31 October 2004 (and therefore not be a regulated mortgage contract) and a second contract entered into on or after 31 October 2004 (and be a regulated mortgage contract).

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AUTH App 4.5

Arranging regulated mortgage contracts

01/12/2004

Definition of the regulated activities involving arranging

AUTH App 4.5.1

Article 25A of the Regulated Activities Order describes two types of regulated activities concerned with arranging regulated mortgage contracts. These are:

(1) making arrangements for another person to:

(a) enter into a regulated mortgage contract as borrower; or

(b) vary the terms of a regulated mortgage contract entered into by him as borrower on or after 31 October 2004 in such a way as to vary his obligations under the contract; and

(2) making arrangements with a view to a person who participates in the arrangements entering into a regulated mortgage contract as borrower.

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AUTH App 4.5.2

The first activity (article 25A(1)) is referred to in this guidance as arranging (bringing about) regulated mortgage contracts. Various points arise:

(1) it is not necessary for the potential borrower himself to be involved in making the arrangements.

(2) this activity is carried on only if the arrangements bring about, or would bring about a regulated mortgage contract. This is because of the exclusion in article 26 (see AUTH App 4.5.4 G).

(3) this activity therefore includes the activities of brokers who make arrangements on behalf of a borrower to enter into or vary a regulated mortgage contract where these arrangements go beyond merely introducing (see AUTH App 4.5.10 G) or advising (although giving advice may be the regulated activity of advising on regulated mortgage contracts). Such arrangements might include, for instance, negotiating the terms of the regulated mortgage contract with the eventual lender, on behalf of the borrower. It also includes the activities of certain so-called 'packagers' (see AUTH App 4.15 (Mortgage activities carried on by 'packagers').

(4) AUTH App 4.6.2 Gcontains examples of variations that are, in the FSA's view, within the definition of advising on regulated mortgage contracts and would also be covered by article 25A(1) arrangements.

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AUTH App 4.5.3

The second activity (article 25A(2)) is referred to in this guidance as making arrangements with a view to regulated mortgage contracts. This activity is different from article 25A(1) ) because it requires a potential borrower to actively participate by utilising the arrangements to enter into a regulated mortgage contract. It does not require that the arrangements would bring about a regulated mortgage contract. Nor does it cover arrangements leading to contract variations. It includes the activities of introducers (see AUTH App 4.5.10 G below) introducing potential borrowers to brokers and lenders. It may also, in certain circumstances, extend to the activities of a publisher, broadcaster or website operator, albeit subject to exclusions in the Regulated Activities Order (see AUTH App 4.5.5 G and AUTH App 4.5.6 G).

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Exclusion: article 25A(1) arrangements not causing a deal

AUTH App 4.5.4

Article 26 of the Regulated Activities Order (Arrangements not causing a deal) excludes from article 25A(1) arrangements which do not bring about or would not bring about the regulated mortgage contract in question. In the FSA's view, a person brings about or would bring about a regulated mortgage contract if his involvement in the chain of events leading to the transaction is of enough importance that without that involvement it would not take place.

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Exclusion: article 25A(2) arrangements enabling parties to communicate

AUTH App 4.5.5

Article 27 of the Regulated Activities Order (Enabling parties to communicate) contains an exclusion that applies to arrangements which might otherwise fall within article 25A(2) merely because they provide the means by which one party to a regulated mortgage contract (or potential regulated mortgage contract) is able to communicate with other parties. Simply providing the means by which parties to a regulated mortgage contract (or potential regulated mortgage contract) are able to communicate with each other is excluded from article 25A(2) only. This will ensure that persons such as Internet service providers or telecommunications networks are excluded if all they do is provide communication facilities (and these would otherwise be considered to be arrangements made with a view to regulated mortgage contracts).

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AUTH App 4.5.6

In the FSA's view, the crucial element of the exclusion in article 27 is the inclusion of the word "merely". When a publisher, broadcaster or Internet website operator goes beyond what is necessary for him to provide his service of publishing, broadcasting or otherwise facilitating the issue of promotions, he may well bring himself within the scope of article 25A(2). Further detailed guidance relating to the scope of the exclusion in article 27 is contained in AUTH App 1.32.6 G to AUTH App 1.32.11 G.

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Exclusion: article 25A(1) and (2) arranging of contracts to which the arranger is a party

AUTH App 4.5.7

Arranging a regulated mortgage contract (or contract variation) to which the arranger is to be a party is excluded from both article 25A(1) and (2) by article 28A of the Regulated Activities Order (Arranging contracts to which the arranger is a party). As a result, a person cannot both be entering into a regulated mortgage contract and arranging a regulated mortgage contract under article 25A as regards a particular regulated mortgage contract. This means that a direct sale by a mortgage lender does not involve the regulated activity of arranging but, if the transaction is completed, does involve the regulated activity of entering into a regulated mortgage contract. The FSA'S rulesarranging regulated mortgage contracts, however, do apply to direct sales.

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Exclusion: article 25A(1) and (2) arrangements with or through authorised persons

AUTH App 4.5.8

An unauthorised person who makes arrangements for or with a view to a regulated mortgage contract between a borrower and an authorised person, is excluded from article 25A(1) and (2) by article 29 of the Regulated Activities Order (Arranging deals with or through authorised persons) if specified conditions as to advice and remuneration are satisfied. For example, the exclusion is dependent on the borrower not receiving any advice on the regulated mortgage contract from the unauthorised person making the arrangements. Additionally, payment must not be received unless it is accounted for to the borrower (which, in the FSA's view, means that it must be paid over to, or treated as belonging to and held to the order of, the borrower).

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Exclusion: article 25A(1)(b) arrangements made in the course of administration by authorised person

AUTH App 4.5.9

Article 29A of the Regulated Activities Order excludes from article 25A(1)(b) (which covers making arrangements for another person to vary the terms of a regulated mortgage contract) certain activities of an unauthorised person who is taking advantage of the exclusion from administering a regulated mortgage contract in article 62 (Exclusion: arranging administration by authorised persons) (see AUTH App 4.8.4 G).

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Exclusion: article 25A(2) arrangements and introducing

AUTH App 4.5.10

Article 33A of the Regulated Activities Order (Introducing to authorised persons) excludes from article 25A(2) arrangements under which a borrower is introduced to certain persons. Introducing is only a regulated activity under article 25A(2) as it does not of itself bring about regulated mortgage contracts (see AUTH App 4.5.2 G).

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AUTH App 4.5.11

The exclusion applies for introductions to:

(1) an authorised person who has permission to carry on a regulated activity specified in article 25A (Arranging regulated mortgage contracts) or article 53A (Advising on regulated mortgage contracts) or article 61(1) (Entering into a regulated mortgage contract as lender); introducers can check the status of an authorised person and its permission by visiting the FSA's register at www.fsa.gov.uk;

(2) an appointed representative who is appointed to carry on a regulated activity specified in article 25A or article 53A of the Regulated Activities Order; introducers can check the status of an appointed representative by visiting the FSA's register at www.fsa.gov.uk; the FSA would normally expect introducers to request and receive confirmation of the regulated activities that the appointed representative is appointed to carry on, prior to proceeding with an introduction;

(3) an overseas person who carries on a regulated activity specified in article 25A (Arranging regulated mortgage contracts) or article 53A (Advising on regulated mortgage contracts) or article 61(1) (Entering into a regulated mortgage contract).

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AUTH App 4.5.12

The exclusion in article 33A only applies when the introducer satisfies two conditions:

(1) he does not receive any money paid by the borrower in connection with any transaction that the borrower enters into with or through the person to whom the borrower is introduced as a result of the introduction, other than money payable to him on his own account; and

(2) before making the introduction he discloses to the borrower all relevant information described in AUTH App 4.5.14 G.

31/10/2004

AUTH App 4.5.13

In the FSA's view money payable to an introducer on his own account includes money legitimately due to him for services rendered to the borrower, whether in connection with the introduction or otherwise. It also includes sums payable to an introducer (for example, a housebuilder) by a borrower in connection with a transfer of property. For example, article 33A allows a housebuilder to receive the purchase price on a property that he sells to a borrower, whom he previously introduced to an authorised person or appointed representative to help him finance the purchase and still take the benefit of the exclusion. This is because the sums that the housebuilder receives in connection with the introduction and with the sale of his property to the borrower are both "payable to him on his own account". The housebuilder may also receive a commission from the person introduced to. He may not, however, receive any sums payable by the borrower to the person to whom the borrower is introduced, for example valuation fees, as those sums are not payable to the housebuilder on his own account

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AUTH App 4.5.14

The information that the introducer must disclose to the borrower prior to making the introduction is, where relevant:

(1) that he is a member of the same group as the person (N) to whom the borrower is introduced;

(2) details of any payment which he will receive from N, by way of fee or commission, for introducing the borrower to N; and

(3) an indication of any other reward or advantage arising out of his introducing to N.

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AUTH App 4.5.15

In the FSA's view, details of fees or commission referred to in AUTH App 4.5.14 G (2) does not require an introducer to provide an actual sum to the borrower, where it is not possible to calculate the full amount due prior to the introduction. This may arise in cases where the fee or commission is a percentage of the eventual loan taken out and the amount of the required loan is not known at the time of the introduction. In these cases, it would be sufficient for the introducer to disclose the method of calculation of the fee or commission, for example the percentage of the eventual loan to be made by N.

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AUTH App 4.5.16

In the FSA's view, the information condition in AUTH App 4.5.14 G (3) requires the introducer to indicate to the borrower any other advantages accruing to him as a result of ongoing arrangements with N relating to the introduction of borrowers. This may include, for example, indirect benefits such as office space, travel expenses, subscription fees and this and other relevant information may be provided on a standard form basis to the borrower, as appropriate.

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AUTH App 4.5.17

The FSA would normally expect an introducer to keep a written record of disclosures made to the borrower under article 33A of the Regulated Activities Order including those cases where disclosure is made on an oral basis only.

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AUTH App 4.5.18

In addition to the exclusion in article 33A, introducers may be able to take advantage of the exclusion in article 33 of the Regulated Activities Order (Introducing). This excludes arrangements where:

(1) they are arrangements under which persons will be introduced to another person;

(2) the person to whom introductions are to be made is:

(a) an authorised person; or

(b) an exempt person acting in the course of business comprising a regulated activity in relation to which he is exempt; or

(c) a person who is not unlawfully carrying on regulated activities in the United Kingdom and whose ordinary business involves him in engaging in certain activities; and

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Other exclusions

AUTH App 4.5.19

The Regulated Activities Order contains a number of other exclusions which have the effect of preventing certain activities from amounting to regulated activities within article 25. These are referred to in AUTH App 4.10 (Exclusions applying to more than one regulated activity). There is also an exclusion where both the arranger and borrower are overseas, which is referred to in AUTH App 4.11 (Link between activities and the United Kingdom).

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AUTH App 4.6

Advising on regulated mortgage contracts

01/12/2004

Definition of 'advising on regulated mortgage contracts'

AUTH App 4.6.1

Article 53A of the Regulated Activities Order (Advising on regulated mortgage contracts) makes advising on regulated mortgage contracts a regulated activity. This covers advice which is both:

(1) given to a person in his capacity as borrower or potential borrower; and

(2) advice on the merits of the borrower:

(a) entering into a particular regulated mortgage contract (whether or not the entering into is done by way of business); or

(b) varying the terms of a regulated mortgage contract entered into by the borrower on or after 31 October 2004 in such a way as to vary the borrower's obligations under the contract.

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AUTH App 4.6.2

In the FSA's view, the circumstances in which a person is giving advice on the borrower varying the terms of a regulated mortgage contract so as to vary his obligations under the contract include (but are not limited to) where the advice is about:

(1) the borrower obtaining a further advance secured on the same land as the original loan; or

(2) a rate switch or a product switch (that is, where the borrower does not change lender but changes the terms for repayment from, say, a variable rate of interest to a fixed rate of interest or from one fixed rate to another); or

(3) the borrower transferring from a repayment mortgage to an interest-only mortgage or the reverse situation.

Although advice on varying the terms of a regulated mortgage contract is not a regulated activity if the contract was entered into before 31 October 2004, there may be instances where the variation to the old contract is so fundamental that it amounts to entering into a new regulated mortgage contract (see AUTH App 4.4.4 G and AUTH App 4.4.13 G (2)). In that case, giving the advice would be a regulated activity.

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AUTH App 4.6.3

For advice to fall within article 53A as set out in AUTH App 4.6.1 G it must:

(1) relate to a particular mortgage contract (that is, one that the borrower may enter into or, in the case of advice on a variation, one that he has already entered into);

(2) be given to a person in his capacity as a borrower or potential borrower;

(3) be advice (that is, not just information); and

(4) relate to the merits of the borrower entering into, or varying the terms of, the contract.

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AUTH App 4.6.4

Each of these aspects is considered in greater detail in AUTH App 4.6.5 G (Advice must relate to a particular regulated mortgage contract) to AUTH App 4.6.17 G (Advice must relate to the merits (of entering into as borrower or varying)). Additionally, the following should be borne in mind:

(1) a person may be carrying on regulated activities involving arranging, whether or not that person is advising on regulated mortgage contracts (see AUTH App 4.5);

(2) the provision of advice or information may involve the communication of a financial promotion (see AUTH App 1 (Financial promotion and related activities); and

(3) AUTH App 1.25 ((Advice must relate to an investment which is a security or contractually based investment) to AUTH App 1.29 (Advice must relate to the merits (of buying or selling a particular investment))

will be relevant to any person who may be advising on other forms of investment at the same time as he advises on regulated mortgage contracts; this includes, for example, a person advising on the merits of using a particular endowment policy or ISA as the means for repaying the capital under an interest-only mortgage.

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Advice must relate to a particular regulated mortgage contract

AUTH App 4.6.5

Advice will come within the regulated activity in article 53A of the Regulated Activities Order only if it relates to a particular regulated mortgage contract (or several particular regulated mortgage contracts). The question is whether a recommendation is made to a customer which either explicitly or implicitly steers the customer to a particular regulated mortgage contract because of its features, such as length or type of interest rate or any other essential feature.

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AUTH App 4.6.6

Advice would not relate to a particular contract if it consisted of a recommendation that a person should take out a mortgage with ABC building society without (expressly or by implication) specifying what kind of mortgage, or if it did not identify any particular lender. AUTH App 4.6.7 G identifies several typical recommendations and indicates whether they will be regulated as advice under article 53A.

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AUTH App 4.6.7

Typical recommendations and whether they will be regulated as advice under article 53A of the Regulated Activities Order

This table belongs to AUTH App 4.6.5 G

Regulated or not?

I recommend you take out the ABC Building Society 2 year fixed rate mortgage at 5%.

Yes. This is advice which steers the borrower in the direction of a particular mortgage which the borrower could enter into.

I recommend you do not take out the ABC Building Society 2 year fixed rate mortgage at 5%.

Yes. This is advice which steers the borrower away from a particular mortgage which the borrower could have entered into.

I recommend that you take out either the ABC Building Society 2 year fixed rate mortgage at 5% or the XYZ Bank standard variable rate mortgage.

Yes. This is advice which steers the borrower in the direction of more than one particular mortgage which the borrower could enter into.

I recommend you take out (or do not take out) an ABC Building Society fixed rate mortgage.

This will depend on the circumstances. If, for example, the society only offers one such mortgage, this would be a recommendation intended implicitly to steer the borrower in the direction of that particular mortgage which the borrower could enter into and therefore would be advice.

I suggest you take out (or do not take out) a mortgage with ABC Building Society.

No. This is not advice which steers the borrower in the direction of a particular mortgage which the borrower could enter into. However, if the society only offers one mortgage, this would be a recommendation intended implicitly to steer the borrower in the direction of that particular mortgage which the borrower could enter into and therefore would be advice.

I suggest you change (or do not change) your current mortgage from a variable rate to a fixed rate.

No in respect of the advice about rate type, as this does not steer the borrower in the direction of a particular mortgage which the borrower could enter into.
Yes in respect of the advice about varying the terms of the particular mortgage that the borrower had already entered into.

I suggest you take out (or do not take out) a variable rate mortgage.

No. This is not advice which steers the borrower in the direction of a particular mortgage which the borrower could enter into.

I recommend you take out (or do not take out) a mortgage.

No. This is not advice which steers the borrower in the direction of a particular mortgage which the borrower could enter into.

I would always recommend buying a house and taking out a mortgage as opposed to renting a property.

No. This is an example of generic advice which does not steer the borrower in the direction of a particular mortgage that he could enter into.

I recommend you do not borrow more than you can comfortably afford.

No. This is an example of generic advice.

If you are looking for flexibility with your mortgage I would recommend you explore the possibilities of either a flexible mortgage or an off-set mortgage. There are a growing number of lenders offering both.

No. This is an example of generic advice.

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AUTH App 4.6.8

Generic or general advice will not fall under article 53A. Examples of generic advice are shown in AUTH App 4.6.7 G.

31/10/2004

AUTH App 4.6.9

In the FSA's view, guiding a person through scripted questions or a decision tree should not, of itself, involve advice within the meaning of article 53A (it should be generic advice). But the combination of advice, which in isolation may properly be considered generic, with the identification of a particular or several particular regulated mortgage contracts may well, in the FSA's view, cause the person to be advising on regulated mortgage contracts; the FSA considers that it is necessary to look at the process as a whole; this is considered in more detail, in the context of scripted questioning, in AUTH App 4.6.22 G (Scripted questioning (including decision trees)).

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Advice given to a person in his capacity as a borrower or potential borrower

AUTH App 4.6.10

For the purposes of article 53A, advice must be given to or directed at someone who is acting as borrower or potential borrower. As indicated in AUTH App 4.4.2 G (Which borrowers?), this means the individual or trustee to whom the credit has been provided by the lender or who is looking to obtain the credit on the security of his property. Advice given to a body corporate will not generally be caught because the advice will not concern a regulated mortgage contract, as defined. But this does not apply where the body corporate is acting as trustee.

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AUTH App 4.6.11

Article 53A will not, for example, apply where advice is given to persons who receive it as:

(1) a lender under or administrator of a regulated mortgage contract; or

(2) an adviser who may use it to inform advice given by him to others; or

(3) a journalist or broadcaster; or

(4) an agent of a borrower unless appointed as the borrower's attorney and therefore entering into the regulated mortgage contract as agent (or proxy) for the borrower.

31/10/2004

AUTH App 4.6.12

Advice will still be covered by article 53A even though it may not be given to or directed at a particular borrower (for example advice given in a periodical publication or on a website).

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Advice or information

AUTH App 4.6.13

In the FSA's view, advice requires an element of opinion on the part of the adviser which steers or is intended to steer a borrower or potential borrower in the direction of one or more particular mortgages. In effect, it is a recommendation as to a course of action. Information on the other hand, involves objective statements of facts or figures.

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AUTH App 4.6.14

In general terms, simply giving balanced and neutral information without making any comment or value judgement on its relevance to decisions which a borrower may make is not advice.

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AUTH App 4.6.15

Information relating to entering into regulated mortgage contracts may often involve one or more of the following:

(1) an explanation of the terms and conditions of a regulated mortgage contract, whether given orally or in writing or by providing leaflets and brochures;

(2) a comparison of the features and benefits of one regulated mortgage contract with another;

(3) the production of scripted questions for the borrower to use in order to exclude options that would fail to meet his requirements; such questions may often go on to identify a range of regulated mortgage contracts with characteristics that appear to meet the borrower's requirements and to which he might wish to give detailed consideration (scripted questioning is considered in more detail in AUTH App 4.6.21 G to AUTH App 4.6.25 G (Scripted questioning (including decision trees));

(4) tables that compare the interest rates and other features of different mortgages;

(5) leaflets or illustrations that help borrowers to decide which type of mortgage to take out;

(6) the provision, in response to a request from a borrower who has identified the main features of the type of mortgage he seeks, of several leaflets together with an indication that all the regulated mortgage contracts described in them have those features.

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AUTH App 4.6.16

In the FSA's opinion, however, such information is likely take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation as described in AUTH App 4.6.10 G. Examples of situations where information provided by a person ('P') are likely to take the form of advice are given below.

(1) P provides information on a selected, rather than balanced and neutral, basis that would tend to influence the decision of the borrower. This may arise where P offers to provide information about mortgages that contain features specified by the borrower but then exercises discretion as to which mortgages to offer to the borrower.

(2) P, as a result of going through the sales process, discusses the merits of one regulated mortgage contract over another, resulting in advice to enter into or not enter into a particular one.

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Advice must relate to the merits (of entering into as borrower or varying)

AUTH App 4.6.17

Advice under article 53A must relate to the pros or cons of entering into a regulated mortgage contract as borrower.

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AUTH App 4.6.18

A neutral and balanced explanation of the implications under a regulated mortgage contract of, for example, exercising certain rights or failing to make interest payments on time, need not, itself, involve advice on the merits of entering into that contract or varying its terms.

31/10/2004

AUTH App 4.6.19

Neither does advice on the merits of using a particular mortgage broker or adviser in his capacity as such amount to advice for the purpose of article 53A. It is not advice on the merits of entering into or varying the terms of a regulated mortgage contract.

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AUTH App 4.6.20

Without explicit or implicit advice on the merits of entering into as borrower or varying the terms of a regulated mortgage contract, advice will not fall under article 53A if it is advice on the likely meaning of uncertain provisions in a regulated mortgage contract or on how to complete an application form.

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Scripted questioning (including decisions trees)

AUTH App 4.6.21

Scripted questioning involves using any form of sequenced questions in order to extract information from a person with a view to facilitating the selection by that person of a mortgage or other product that meet his needs. A decision tree is an example of scripted questioning. The process of going through the questions will usually narrow down the range of options that are available. Scripted questions must be prepared in advance of their actual use.

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AUTH App 4.6.22

Undertaking the process of scripted questioning gives rise to particular issues concerning advice. These mainly involve two aspects of this regulated activity. These are that advice must relate to a particular regulated mortgage contract (see AUTH App 4.6.5 G) and the distinction between information and advice (see AUTH App 4.6.13 G). Whether or not scripted questioning in any particular case is advising on regulated mortgage contracts will depend on all the circumstances. If the process involves identifying one or more particular regulated mortgage contracts then, in the FSA's view, to avoid advising on regulated mortgage contracts, the critical factor is likely to be whether the process is limited to, and likely to be perceived by the borrower as, assisting the borrower to make his own choice of product which has particular features which the borrower regards as important. The questioner will need to avoid providing any judgement on the suitability of one or more products for the borrower. See also AUTH App 4.6.4G for other matters that may be relevant.

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AUTH App 4.6.23

The potential for variation in the form, content and manner of scripted questioning is considerable, but there are two broad types. The first type involves providing questions and answers which are confined to factual matters (for example, whether a borrower wishes to pay a fixed or variable rate of interest or the size of deposit available). In the FSA's view, this does not of itself amount to advising on regulated mortgage contracts, as it involves the provision of information rather than advice. There are various possible scenarios, including the following:

(1) the questioner may go on to identify several regulated mortgage contracts which match features identified by the scripted questioning; provided these are presented in a balanced and neutral way (for example, they identify all the matching regulated mortgage contracts, without making a recommendation as to a particular one) this need not of itself involve advising on regulated mortgage contracts;

(2) the questioner may go on to advise the borrower on the merits of one particular regulated mortgage contract over another; this would be advising on regulated mortgage contracts;

(3) the questioner may, before or during the course of the scripted questioning, give a recommendation or opinion which influences the choice of mortgage contract and, following the scripted questioning, identify one or more particular regulated mortgage contracts; the key issue then is whether the advice can be said to relate to a particular regulated mortgage contract (see further AUTH App 4.6.22 G)).

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AUTH App 4.6.24

The second type of scripted questioning involves providing questions and answers incorporating opinion, judgement or recommendations (for example, whether a repayment mortgage or interest-only mortgage is a better option or whether interest rates are likely to rise). There are various possible scenarios, including the following:

(1) the scripted questioning may not lead to the identification of any particular regulated mortgage contract; in this case, the questioner has provided advice, but it is generic advice and does not amount to advising on regulated mortgage contracts;

(2) the scripted questioning may lead to the identification of one or more particular regulated mortgage contracts; the key issue then is whether the advice can be said to relate to a particular regulated mortgage contract (see further AUTH App 4.6.22 G).

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AUTH App 4.6.25

In the scenarios identified in AUTH App 4.6.23 G (3) and AUTH App 4.6.24 G (2), the FSA considers that it is necessary to look at the process and outcome of scripted questioning as a whole. It may be that the element of advice incorporated in the questioning may properly be viewed as generic advice if it were considered in isolation. But, although the actual advice may be generic, the process has ended in identifying one or more particular regulated mortgage contracts. The combination of the generic advice and the identification of a particular or several particular regulated mortgage contracts to which it leads may well, in the FSA's view, cause the questioner to be advising on regulated mortgage contracts. Factors that may be relevant in deciding whether the process involves advising on regulated mortgage contracts may include:

(1) any representations made by the questioner at the start of the questioning relating to the service he is to provide;

(2) the context in which the questioning takes place;

(3) the stage in the questioning at which the opinion is offered and its significance;

(4) the role played by any questioner who guides a person through the scripted questions;

(5) the outcome of the questioning (whether particular regulated mortgage contracts are highlighted, how many of them, who provides them, their relationship to the questioner and so on); and

(6) whether the scripted questions and answers have been provided by, and are clearly the responsibility of, an unconnected third party (for example, the FSA), and all that the questioner has done is help the borrower understand what the questions or options are and how to determine which option applies to his particular circumstances.

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Medium used to give advice

AUTH App 4.6.26

With the exception of periodicals, broadcasts and other news or information services (see AUTH App 4.6.30 G (Exclusion: periodical publications, broadcasts and websites)) the medium used to give advice should make no material difference to whether or not the advice is caught by article 53A.

31/10/2004

AUTH App 4.6.27

Advice can be provided in many ways including:

(1) face to face;

(2) orally to a group;

(3) by telephone;

(4) by correspondence (including e-mail);

(5) in a publication, broadcast or website; and

(6) through the provision of an interactive software system.

31/10/2004

AUTH App 4.6.28

Taking electronic commerce as an example, the use of electronic decision trees does not present any novel problems. The same principles apply as with a paper version (see AUTH App 4.6.21 G to AUTH App 4.6.25 G (Scripted questioning (including decision trees))).

31/10/2004

AUTH App 4.6.29

Advice in publications, broadcasts and websites is subject to a special regime - see AUTH App 4.6.30 G (Exclusion: periodical publications, broadcasts and websites) and AUTH 7 (Periodical publications, news services and broadcasts: applications for certification).

31/10/2004

Exclusion: periodical publications, broadcasts and websites

AUTH App 4.6.30

The main exclusion from advising on regulated mortgage contracts relates to advice given in periodical publications, regularly updated news and information services and broadcasts (article 54 of the Regulated Activities Order (Advice given in newspapers etc)). The exclusion applies if the principal purpose of any of these is neither to give advice of the kind to which article 53 (Advising on investments) or article 53A applies nor to lead or enable persons to:

(1) acquire or dispose of securities or contractually based investments; or

(2) enter as borrower into regulated mortgage contracts or vary the terms of regulated mortgage contracts entered into by such persons as the borrower.

This is explained in greater detail, together with the provisions on the granting of certificates, in AUTH 7 (Periodical publications, news services and broadcasts: applications for certification).

31/10/2004

Exclusion: advice in the course of administration by authorised person

AUTH App 4.6.31

Article 54A of the Regulated Activities Order excludes from advising on regulated mortgage contracts certain activities of an unauthorised person which is taking advantage of the exclusion from administering a regulated mortgage contract in article 62 (see AUTH App 4.8.4 G).

31/10/2004

Other exclusions

AUTH App 4.6.32

The Regulated Activities Order contains a number of other exclusions which have the effect of preventing certain activities from amounting to advising on regulated mortgage contracts. These are referred to in AUTH App 4.10 (Exclusions applying to more than one regulated activity).

31/10/2004

AUTH App 4.7

Entering into a regulated mortgage contract

01/12/2004

Definition of 'entering into a regulated mortgage contract'

AUTH App 4.7.1

Article 61(1) of the Regulated Activities Order makes entering into a regulated mortgage contract as lender a regulated activity.

31/10/2004

Exclusions

AUTH App 4.7.2

The Regulated Activities Order contains an exclusion which has the effect of preventing certain activities of trustees, nominees and personal representatives from amounting to entering into a regulated mortgage contract. This is referred to in AUTH App 4.10 (Exclusions applying to more than one regulated activity). There is also an exclusion where both the lender and borrower are overseas, which is referred to in AUTH App 4.11 (Link between activities and the United Kingdom).

31/10/2004

Transfer of lending obligations

AUTH App 4.7.3

A person who provides credit to a borrower under a regulated mortgage contract will enter into a regulated mortgage contract, even if the lending obligations under that contract are subsequently transferred to a third party. Consequently, a person who acts as a so-called 'correspondent lender' in the mortgage market will need to seek authorisation.

31/10/2004

AUTH App 4.8

Administering a regulated mortgage contract

01/12/2004

Definition of 'administering a regulated mortgage contract'

AUTH App 4.8.1

Article 61(2) of the Regulated Activities Order makes administering a regulated mortgage contract a regulated activity 'where the contract was entered into by way of business' on or after 31 October 2004.

31/10/2004

AUTH App 4.8.2

The definition does not include administration of a regulated mortgage contract which was not entered into by way of business. See AUTH App 4.3.3 G for a discussion of the 'by way of business' test. The definition also does not include administration of a mortgage which was entered into before 31 October 2004. See, however, AUTH App 4.4.4 G and AUTH App 4.4.13 G for a discussion of how a variation of a mortgage contract entered into before 31 October 2004 could amount to the entry into a new regulated mortgage contract on or after 31 October 2004.

31/10/2004

AUTH App 4.8.3

Under article 61(3)(b) of the Regulated Activities Order, administering a regulated mortgage contract is defined as either or both of:

(1) notifying the borrower of changes in interest rates or payments due under the contract, or of other matters of which the contract requires him to be notified; and

(2) taking any necessary steps for the purposes of collecting or recovering payments due under the contract from the borrower;

but does not include merely having or exercising a right to take action to enforce the regulated mortgage contract, or to require that action is or is not taken.

31/10/2004

Exclusion: arranging administration by authorised persons

AUTH App 4.8.4

Article 62 of the Regulated Activities Order provides that a person who is not an authorised person does not administer a regulated mortgage contract if he:

(1) arranges for a firm with permission to administer a regulated mortgage contract (a 'mortgage administrator') to administer the contract; or

(2) administers the regulated mortgage contract itself, provided that the period of administration is no more than one month after the arrangement in (1) has come to an end.

31/10/2004

AUTH App 4.8.5

This exclusion may be of particular interest to a special purpose vehicle which administers regulated mortgage contracts transferred to it as part of a securitisation transaction.

31/10/2004

AUTH App 4.8.6

If an unauthorised administrator makes arrangements for a mortgage administrator to administer its regulated mortgage contracts, the exclusion may cease to be available because the mortgage administrator ceases to have the required permission, or because the arrangement is terminated. The exclusion gives the unauthorised administrator a one-month grace period during which it may administer the contracts itself. If the period of administration exceeds one month, the unauthorised administrator will be in breach of the general prohibition, and the FSA may take proceedings in respect of the breach. However:

(1) under section 23(3) of the Act, it is a defence in such proceedings for a person to show that 'he took all reasonable precautions and exercised all due diligence to avoid committing the offence';

(2) the FSA would consider whether a person has taken 'all reasonable precautions and exercised all due diligence' on a case by case basis; what is reasonable is a matter for the senior management of the unauthorised administrator to decide in each case, taking account of, for example, the financial standing of the mortgage administrator and its ability to perform its obligations under the administration contract;

(3) factors that the FSA would take into account in assessing whether an unauthorised administrator has taken 'all reasonable precautions and exercised all due diligence' would include:

(a) the level of the person's preparedness for a mortgage administrator to cease providing administration services; and

(b) the reasons for, and the circumstances of, the termination of arrangements with a mortgage administrator;

(4) whether any agreement made by an unauthorised administrator would be enforceable under section 26 of the Act (Agreements made by unauthorised persons) depends on whether the court is satisfied that this would be just and equitable; in this context, the court may have regard to the extent to which the administrator has complied with the FSA's guidance.

31/10/2004

Exclusion: administration pursuant to agreement with authorised person

AUTH App 4.8.7

Under article 63 of the Regulated Activities Order, a person who is not an authorised person does not administer a regulated mortgage contract if he administers the contract under an agreement with a firm with permission to administer a regulated mortgage contract. A firm with permission to administer a regulated mortgage contract may thus outsource or delegate the administration function to an unauthorised third party. A firm that proposes to do this should however note, as set out in SYSC 3.2.4 G (1), that the FSA will continue to hold it responsible for the way in which the administration is carried on.

31/10/2004

Other exclusions

AUTH App 4.8.8

The Regulated Activities Order contains an exclusion which has the effect of preventing certain activities of trustees, nominees and personal representatives from amounting to administering regulated mortgage contracts. This is referred to in AUTH App 4.10 (Exclusions applying to more than one regulated activity). There is also an exclusion where both the administrator and borrower are overseas, which is referred to in AUTH App 4.11 (Link between activities and the United Kingdom).

31/10/2004

AUTH App 4.9

Agreeing to carry on a regulated activity

01/12/2004

AUTH App 4.9.1

Under article 64 of the Regulated Activities Order (Agreeing to carry on specified kinds of activity), in addition to the regulated activities of arranging (bringing about), making arrangements with a view to, advising on, entering into and administering regulated mortgage contracts, agreeing to do any of these things is itself a regulated activity. In the FSA's opinion, this activity concerns the entering into of a legally binding agreement to provide the services that it concerns. So a person is not carrying on a regulated activity involving agreeing merely because he makes an offer to do so.

31/10/2004

AUTH App 4.9.2

To the extent that an exclusion applies in relation to a regulated activity, then 'agreeing' to carry on an activity within the exclusion will not be a regulated activity. This is the effect of article 4(3) of the Regulated Activities Order.

31/10/2004

AUTH App 4.10

Exclusions applying to more than one regulated activity

01/12/2004

Exclusion: Activities carried on in the course of a profession or non-investment business

AUTH App 4.10.1

The exclusion in article 67 of the Regulated Activities Order (Activities carried on in the course of a profession or non-investment business) applies to the regulated activities of arranging (bringing about), making arrangements with a view to and advising on regulated mortgage contracts. (AUTH App 4.14 contains further guidance on mortgage activities carried on by professional firms.)

31/10/2004

AUTH App 4.10.2

Arranging (bringing about), making arrangements with a view to and advising on regulated mortgage contracts are excluded if they are carried on by a person in the course of carrying on a profession or business (other than a regulated activity). This is the case if it may reasonably be regarded as necessary for him to make the arrangements or give the advice in order to provide his professional or other services and he is not separately paid for making the arrangements or giving the advice.

31/10/2004

AUTH App 4.10.3

In the FSA's view, for arranging or advice to be a necessary part of other services it must, as a general rule, be the case that it is not possible for the other services to be provided unless the arranging or advising are also provided.

31/10/2004

AUTH App 4.10.4

Situations where this exclusion might apply, in the FSA's view, are set out below:

(1) Advice by solicitors: the provision of legal services may involve a solicitor advising his client on the legal effects and consequences of entering into a particular regulated mortgage contract. To the extent that this may involve advice on the merits of entering into the contract it is likely to be a necessary part of the legal advice. But it would not be necessary for the solicitor to go on to recommend that his client would be better to enter into a different particular regulated mortgage contract.

(2) Advice by licensed conveyancers: As a necessary part of conveyancing work and under their duty of care to the client, a licensed conveyancer may state that the mortgage the client has applied for is right for them or not. If the client has already applied for a mortgage and the conveyancer just says that their choice is right or wrong but does not recommend alternatives, then that advice is likely to be excluded. But if the conveyancer recommends an alternative then that advice is unlikely to be excluded.

(3) Conveyancing as arranging: The provision of pure conveyancing services (whether performed by a solicitor or a licensed conveyancer) will, themselves, be arrangements within the scope of article 25A. So they will be excluded under article 67. But if the client does not yet have a mortgage, an introduction to or other arrangement involving a lender is unlikely to be a necessary part of conveyancing services.

(4) Debt counselling services: The provision of debt counselling services may involve the counsellor advising his client on the merits of varying the terms of an existing regulated mortgage contract and, in certain cases, assisting a distressed borrower in corresponding with a lender. Such advice and arrangements are likely to be a necessary part of the debt counselling services. But it would not be a necessary part of those services for the counsellor to offer advice on the merits of his client entering into a new particular regulated mortgage contract.

31/10/2004

Exclusion: Trustees, nominees and personal representatives

AUTH App 4.10.5

There are exclusions that apply, in certain circumstances, in relation to each of the regulated mortgage activities if the person carrying on the activity is acting in the capacity of trustee or personal representative. Article 66 of the Regulated Activities Order (Trustees, nominees and personal representatives) sets out the circumstances in which the exclusions apply. The terms of these differ slightly depending on the regulated activity.

31/10/2004

AUTH App 4.10.6

For each of the regulated activities of arranging (bringing about), making arrangements with a view to and advising on regulated mortgage contracts, the exclusions apply if the trustee or personal representative is acting in that capacity and:

(1) the arrangements he makes concern the entering into or variation of regulated mortgage contracts and the contracts are to be entered into or varied either by himself and a fellow trustee or personal representative or by the beneficiary under the trust, will or estate on behalf of which he is acting; or

(2) the advice is given to such trustees or personal representatives or beneficiaries.

31/10/2004

AUTH App 4.10.7

For each of the regulated activities of entering into a regulated mortgage contract and administering a regulated mortgage contract, the exclusions apply if the trustee or personal representative is acting in that capacity and the borrower is a beneficiary under the trust, will or estate on behalf of which he is acting.

31/10/2004

AUTH App 4.10.8

In every case, the trustee or personal representative must not receive any remuneration that is additional to any he receives for acting in his capacity as trustee or personal representative. But a person is not to be regarded as receiving additional remuneration merely because his remuneration as trustee or personal representative is calculated by reference to time spent.

31/10/2004

AUTH App 4.11

Link between activities and the United Kingdom

01/12/2004

Introduction

AUTH App 4.11.1

Section 19 of the Act (The general prohibition) provides that the requirement to be authorised under the Act only applies in relation to regulated activities which are carried on 'in the United Kingdom'. In many cases, it will be quite straightforward to identify where an activity is carried on. But when there is a cross-border element, for example because a borrower is outside the United Kingdom or because some other element of the activity happens outside the United Kingdom, the question may arise as to where the activity is carried on. This section describes the legislation that is relevant to this question and gives the FSA's views on various scenarios.

31/10/2004

AUTH App 4.11.2

Even if a person concludes that he is not carrying on a regulated activity in the United Kingdom, he will need to ensure that he does not contravene other provisions of the Act that apply to unauthorised persons. These include the controls on financial promotion (section 21 (Financial promotion) of the Act) (see AUTH App 1 (Financial promotion and related activities)), and on giving the impression that a person is authorised (section 24 (False claims to be authorised or exempt)).

31/10/2004

Legislative provisions: definition of "regulated mortgage contract"

AUTH App 4.11.3

A contract is only a regulated mortgage contract if the land is in the United Kingdom (see AUTH App 4.4.5 G (Land in the United Kingdom)).

31/10/2004

Legislative provisions: section 418 of the Act

AUTH App 4.11.4

Section 418 of the Act deals with the carrying on of regulated activities in the United Kingdom. It extends the meaning that 'carry on a regulated activity in the United Kingdom' would ordinarily have by setting out additional cases. The Act states that in these cases a person who is carrying on a regulated activity but would not otherwise be regarded as carrying on the activity in the United Kingdom is, for the purposes of the Act, to be regarded as carrying on the activity in the United Kingdom.

31/10/2004

AUTH App 4.11.5

For the purposes of regulated mortgage activities, sections 418(2), (4), (5), (5A) and (6) are relevant, as follows:

(1) Section 418(2) refers to a case where a UK-based person carries on a regulated activity in another EEA State in the exercise of rights under a Single Market Directive. The only Single Market Directive which is relevant to mortgages is the Banking Consolidation Directive.

(2) Section 418(4) refers to the case where a UK-based person carries on a regulated activity and the day-to-day management of the activity is the responsibility of an establishment in the United Kingdom.

(3) Section 418(5) refers to the case where a regulated activity is carried on by a person who is not based in the United Kingdom but is carried on from an establishment maintained by him in the United Kingdom.

(4) Section 418(5A) refers to the case where an electronic commerce activity is carried on with or for a person in an EEA State from an establishment in the United Kingdom. See further AUTH App 4.11.21 G (E-Commerce Directive); and

(5) Section 418(6) makes it clear that for the purposes of sections 418(2) to (5A), it is irrelevant where the person with whom the activity is carried on is situated.

31/10/2004

Legislative provisions: overseas persons exclusion

AUTH App 4.11.6

The exclusions in article 72(5A) to (5F) of the Regulated Activities Order (Overseas persons) provide that an overseas person does not carry on the regulated activities of:

(1) arranging (bringing about) or making arrangements with view to a regulated mortgage contract;

(2) entering into a regulated mortgage contract; or

(3) administering a regulated mortgage contract;

if the borrower (and each of them, if more than one) is an individual and is normally resident overseas. In the case of arranging a variation of, or administration of, an existing regulated mortgage contract, each borrower must be an individual who was normally resident overseas when he entered into the contract. In the FSA's view, normal residence for the purposes of this exclusion envisages physical presence with a degree of continuity, making allowance for occasional temporary absences (e.g. holiday). An overseas person under article 3 of the Regulated Activities Order (Interpretation) is a person who carries on certain regulated activities albeit not from a permanent place of business maintained by him in the United Kingdom.

31/10/2004

AUTH App 4.11.7

An overseas person might advise a person in the United Kingdom on an endowment assurance at the same time as advising on a regulated mortgage contract. If so, whilst the overseas person exclusion in article 72(5) will apply in relation to the advice on the endowment assurance, there will be no 'overseas persons exclusion' for the advice on the regulated mortgage contract.

31/10/2004

Territorial scenarios: general

AUTH App 4.11.8

The FSA's view of the effect of the Act and Regulated Activities Order in various territorial scenarios is set out in the remainder of this section. In those scenarios:

(1) the term "service provider" is used to describe a person carrying on any of the regulated mortgage activities;

(2) the term "borrower" refers to a borrower who is an individual and not a trustee; the position of a borrower acting as a trustee is not considered; and

(3) it is assumed that the activity is not an electronic commerce activity (as to which, see AUTH App 4.11.21 G (E-Commerce Directive)).

AUTH App 4.11.9 G contains a simplified tabular summary of those views, which should be used only in conjunction with the more detailed analysis.

31/10/2004

AUTH App 4.11.9

Simplified summary of the territorial scope of the regulated mortgage activities, to be read in conjunction with the rest of this section.

This table belongs to AUTH App 4.11.8 G

Individual borrower resident and located:

in the UK

outside the UK

Service provider carrying on regulated activity from establishment:

in the UK

Yes

outside the UK

Yes

Yes = authorisation or exemption required

No = authorisation or exemption not required

31/10/2004

AUTH App 4.11.10

Where a person is carrying on any of the regulated mortgage activities from an establishment maintained by him in the United Kingdom, that person will be 'carrying on a regulated activity in the United Kingdom'. The location and residence of the borrower is irrelevant. That is the practical effect of sections 418(4), (5) and (6) of the Act.

31/10/2004

AUTH App 4.11.11

There may also be situations where a lender, who does not maintain an establishment in the United Kingdom, provides services in the United Kingdom. For instance, a lender might attend a property exhibition in the United Kingdom at which he sets up a loan with a borrower. A lender might also attend the offices of its UK-based lawyers, or appoint them as its agent, to enter into a contract with a borrower. In these cases, the overseas lender would only be carrying on a regulated activity in the United Kingdom if he subsequently enters into a regulated mortgage contract with a UK resident. This is because arrangements made with borrowers at the exhibition would be subject to the exclusion in article 28 of the Regulated Activities Order (Arranging transactions to which the arranger is a party) (see AUTH App 4.5.7 G). As regards entering into a regulated mortgage contract with a borrower resident overseas, this would be subject to the overseas persons exclusion.

31/10/2004

Service provider overseas: general

AUTH App 4.11.12

If a service provider is overseas, the question of whether that person is carrying on a regulated activity in the United Kingdom will depend upon:

(1) the type of regulated activity being carried on;

(2) section 418 of the Act;

(3) the residence and location of the borrower;

(4) the application of the overseas persons exclusion in article 72(5A) to (5F) of the Regulated Activities Order; and

(5) whether the service provider is carrying on an electronic commerce activity.

The factors in (1), (3) and (4) are considered in relation to each regulated activity in AUTH App 4.11.13 G to AUTH App 4.11.20 G. The factor in (5) is considered in AUTH App 4.11.21 G.

31/10/2004

Service provider overseas: arranging regulated mortgage contracts

AUTH App 4.11.13

When a person is arranging (bringing about) regulated mortgage contracts or making arrangements with a view to regulated mortgage contracts from overseas, the question of whether he will be carrying on regulated activities in the United Kingdom will depend on the relevant circumstances. In the FSA's view factors to consider include:

(1) the territorial limitation in the definition of regulated mortgage contract so that regulation only applies if the land is in the United Kingdom;

(2) the overseas persons exclusion in article 72(5A) to (5C); and

(3) where the arrangements are in fact made.

31/10/2004

AUTH App 4.11.14

In the FSA's view:

(1) if the borrower is normally resident in the United Kingdom, the clear territorial limitation in the definition of regulated mortgage contract carries most weight in determining where regulation should apply; it is likely that the arranger will be carrying on regulated activities in the United Kingdom;

(2) if the borrower is normally resident overseas, the arrangements are excluded by the overseas persons exclusion.

In the case of arranging (bringing about) regulated mortgage contracts, the normal residence of the borrower at the time the arrangements are made is the determining factor, except in the case of arranging (bringing about) a variation of a contract, in which case it is the normal residence of the borrower at the time that the regulated mortgage contract was entered into. In the case of making arrangements with a view to regulated mortgage contracts, the normal residence of the borrower at the time he participates in the arrangements is the determining factor.

31/10/2004

Service provider overseas: advising on regulated mortgage contracts

AUTH App 4.11.15

In the FSA's view, advising on regulated mortgage contracts is carried on where the borrower receives the advice. Accordingly:

(1) if the borrower is located in the United Kingdom, a person advising that borrower on regulated mortgage contracts is carrying on a regulated activity in the United Kingdom; but

(2) if the service provider and borrower are both located overseas, the regulated activity is not carried on in the United Kingdom.

31/10/2004

Service provider overseas: entering into a regulated mortgage contract

AUTH App 4.11.16

The effect of article 72(5D) of the Regulated Activities Order is that an overseas person does not carry on the regulated activity of entering into a regulated mortgage contract if the borrower is resident overseas at the time the contract is entered into.

31/10/2004

AUTH App 4.11.17

In the FSA's view, in circumstances other than those excluded by article 72(5D) of the Regulated Activities Order, an overseas lender is likely to carry on the regulated activity of entering into regulated mortgage contracts in the United Kingdom. This is because of:

(1) the territorial limitation in the definition of regulated mortgage contract so that regulation applies only if the land is in the United Kingdom;

(2) the general principle and practice that contracts relating to land are usually governed by the law of the place where the land is situated;

(3) practical issues of conveyancing; a lender is likely to use the services of a solicitor or licensed conveyancer operating from the United Kingdom, who enters into the regulated mortgage contract as agent for the lender in the United Kingdom; and

(4) the existence of the overseas persons exclusion in article 72(5D).

31/10/2004

Service provider overseas: administering a regulated mortgage contract

AUTH App 4.11.18

The effect of article 72(5E) and (5F) of the Regulated Activities Order is that an overseas person who administers a regulated mortgage contract, where the borrower was resident overseas at the time that the contract was entered into, does not carry on the regulated activity of administering a regulated mortgage contract.

31/10/2004

AUTH App 4.11.19

In the FSA's view, in circumstances other than those excluded by article 72(5E) of the Regulated Activities Order, an overseas administrator is likely to carry on the regulated activity of administering a regulated mortgage contract in the United Kingdom. This is because:

(1) the territorial limitation in the definition of regulated mortgage contract means that regulation applies only if the land is in the United Kingdom;

(2) when administrators notify borrowers resident in the United Kingdom of matters pursuant to a regulated mortgage contract, such notification is likely to be carried on in the United Kingdom;

(3) the steps involved in collecting or recovering payments will generally include giving notice to the borrower at his UK address;

(4) legal action to recover sums due under regulated mortgage contracts will in many cases require proceedings before courts in the United Kingdom, either to enforce regulated mortgage contracts subject to the jurisdiction of these courts or to register and enforce judgements obtained elsewhere, in the case of contracts subject to non-UK jurisdictions; and

(5) of the existence of the exclusion in article 72(5E) (Overseas persons).

31/10/2004

Service provider: agreeing to carry on a regulated activity

AUTH App 4.11.20

In most cases, there will be no preliminary agreement to enter into a regulated mortgage contract in advance of entering into the contract itself. Moreover, the exclusions relevant to a regulated activity are taken into account to determine whether a person is agreeing to carry on that regulated activity. So, for example, agreeing to arrange regulated mortgage contracts in cases where borrower and service provider are overseas, would not be regulated activities because the activities themselves are outside the scope of regulation. Otherwise, in the FSA's view, the issue of where agreeing to carry on a regulated activity takes place will depend on such factors as a contractual analysis of where the agreement is entered into, including where appropriate the general position at common law (see, for example, AUTH App 4.11.17 G).

31/10/2004

E-Commerce Directive

AUTH App 4.11.21

The E-Commerce Directive removes restrictions on the cross-border provision of services by electronic means, introducing a country of origin approach to regulation. This requires EEA States to impose their requirements on the outward provision of such services and to lift them from inward providers. The E-Commerce Directive contains only a few exceptions, termed derogations, from this principle. The E-Commerce Directive defines an e-commerce service (termed an information society service) as any service, normally provided for remuneration, at a distance, by electronic means, and at the individual request of the recipient of the service. So, for example, it includes services provided over the internet, by solicited e-mail, and interactive digital television. Further guidance is contained in the FSA's E-Commerce Directive sourcebook (ECO).

31/10/2004

Distance marketing directive

AUTH App 4.11.22

The FSA will be responsible for implementing the Distance Marketing Directive for those firms and activities it regulates. The FSA and the Treasury agree that the Distance Marketing Directive is intended to operate on a country of origin basis, except where a firm is marketing into the UK from an establishment in an EEA State which has not implemented the Directive.

31/10/2004

AUTH App 4.12

Appointed representatives

01/12/2004

What is an appointed representative?

AUTH App 4.12.1

Section 39 of the Act makes provision exempting appointed representatives from the need to obtain authorisation. An appointed representative is a person who is a party to a contract with an authorised person which permits or requires the appointed representative to carry on certain regulated activities.SUP 12 (Appointed representatives) contains guidance relating to appointed representatives.

31/10/2004

AUTH App 4.12.2

A person who is an authorised person cannot be an appointed representative (see section 39(1) of the Act (Exemption of appointed representatives)).

31/10/2004

Business for which an appointed representative is exempt

AUTH App 4.12.3

An appointed representative can carry on only those regulated activities which are specified in the Appointed Representatives Regulations. Arranging (bringing about), making arrangements with a view to and advising on regulated mortgage contracts (as well as agreeing to do so) will be included in those regulations with effect from 31 October 2004.

31/10/2004

Persons who are not already appointed representatives

AUTH App 4.12.4

A person who is not already an appointed representative for designated investment business activities, and who may wish to become one in relation to the regulated activities of arranging (bringing about), making arrangements with a view to or advising on regulated mortgage contracts, can do so. He must be appointed under a written contract by an authorised person, who has permission to carry on those regulated activities, and who accepts responsibility for the appointed representative's actions when acting for him. SUP 12.4 (What must a firm do when it appoints an appointed representative?) and SUP 12.5 (Contracts: required terms) set out the detailed requirements that must be met for an appointment to be made.

31/10/2004

Persons who are already appointed representatives

AUTH App 4.12.5

Where a person is already an appointed representative (in relation to any non-mortgage activities) and he proposes to carry on, with effect from 31 October 2004, any regulated mortgage activities, he will need to consider the following matters.

(1) He must become authorised if his proposed mortgage activities include either entering into a regulated mortgage contract or administering a regulated mortgage contract. These activities may not be carried on by appointed representatives and the Act does not permit any person to be exempt for some activities and authorised for others. Once authorised, the person may only carry on the regulated activities that are covered by his permission. He will therefore need to apply for a permission to cover all the regulated activities that he proposes to carry on on or after 31 October 2004.

(2) If he proposes to carry on the regulated activities of arranging (bringing about), making arrangements with a view to or advising on regulated mortgage contracts, he may be able to do so as an appointed representative. But this will depend on a number of issues:

(a) he will need to be appointed by an authorised person who is prepared to accept responsibility for the appointed representative's regulated mortgage activities when acting for him. The authorised person must have permission to carry on these regulated mortgage activities.

(b) if these regulated mortgage activities are to be carried on for the same authorised person who has already appointed him for his non-mortgage regulated activities, the contract between them will need to be amended to reflect the additional activities. Other amendments to the contract may be required.

(d) if the regulated mortgage activities relating to arranging are to be limited to making introductions, he may be able to operate within the exclusion for introducers described at AUTH App 4.5.10 G. This is different from the exclusions for introductions relating to securities and contractually based investments, which are described at AUTH App 1.33.

31/10/2004

AUTH App 4.13

Other exemptions

01/12/2004

AUTH App 4.13.1

Certain named persons are exempted by the Exemption Order from the need to obtain authorisation. The following bodies are exempt in relation to carrying on by them of any of the regulated mortgage activities:

(1) local authorities (paragraph 47 of the Schedule to the Exemption Order) but not their subsidiaries;

(2) registered social landlords in England and Wales within the meaning of Part I of the Housing Act 1996 (paragraph 48(a) of the Schedule to the Exemption Order) but not their subsidiaries;

(3) registered social landlords in Scotland within the meaning of the Housing (Scotland) Act 2001 (paragraph 48(2)(b) of the Schedule to the Exemption Order) but not their subsidiaries;

(4) The Housing Corporation (paragraph 48(c) of the Schedule to the Exemption Order);

(5) Scottish Homes (paragraph 48(d) of the Schedule to the Exemption Order); and

(6) The Northern Ireland Housing Executive (paragraph 48(e) of the Schedule to the Exemption Order).

31/10/2004

AUTH App 4.14

Mortgage activities carried on by professional firms

01/12/2004

Introduction

AUTH App 4.14.1

Professional firms (broadly, firms of solicitors, accountants and actuaries) may carry on regulated mortgage activities in the course of their usual professional activities. The regulated activities of advising on, arranging (bringing about), making arrangements with a view to and administering regulated mortgage contracts are those most likely to be relevant.

31/10/2004

AUTH App 4.14.2

In the FSA's view, the following exclusions are likely, in many cases, to exclude the normal activities of professional firms from amounting to regulated mortgage activities:

(1) article 67 of the Regulated Activities Order (Activities carried on in the course of a profession or non-investment business), which applies in relation to the advising and arranging activities (see AUTH App 4.10.1 G);

(1) article 66 of the Regulated Activities Order (Trustees, nominees and personal representatives) which applies in relation to each of the regulated mortgage activities (see AUTH App 4.10.5 G); and

(1) article 63 of the Regulated Activities Order (Administration pursuant to agreement with authorised person) which applies in relation to administering a regulated mortgage contract (see AUTH App 4.8.7 G); in the FSA's view, this would exclude steps taken by a solicitor to recover payments due under a regulated mortgage contract if his instructions come from an authorised person with permission to administer a regulated mortgage contract.

31/10/2004

AUTH App 4.14.3

In addition, a professional firm may, in certain circumstances, be able to use the Part XX exemption to avoid any need for authorisation. PROF 2 (Status of exempt professional firm) contains general guidance on the Part XX exemption. In particular, PROF 2.1.9 G explains that the Treasury have specified certain regulated activities to which the Part XX exemption cannot apply in the Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities Order 2001 ("the Non-Exempt Activities Order"). AUTH App 4.14.4 G to AUTH App 4.14.6 G explain which of the regulated activities relating to regulated mortgage contracts have been so specified.

31/10/2004

Part XX exemption: arranging regulated mortgage contracts

AUTH App 4.14.4

Arranging (bringing about) a regulated mortgage contract and making arrangements with a view to a regulated mortgage contract have not been specified in the Non-Exempt Activities Order. Accordingly, a professional firm may carry on these regulated activities without authorisation, provided the other conditions of the Part XX exemption are complied with.

31/10/2004

Part XX exemption: advising on regulated mortgage contracts

AUTH App 4.14.5

Advising on regulated mortgage contracts has been specified in the Non-Exempt Activities Order. However, a professional firm is prevented from using the Part XX exemption to advise on regulated mortgage contracts only if the advice it gives consists of a recommendation. This will be the case if the recommendation is made to an individual to enter into a regulated mortgage contract with a lender who would, in entering into the contract, carry on the regulated activity of entering into a regulated mortgage contract, irrespective of whether the lender is an authorised or exempt person or would carry on the activity by way of business. However, a professional firm is allowed to give advice that involves a recommendation of this kind provided the advice endorses a corresponding recommendation given to the borrower by an authorised person who has permission to advise on regulated mortgage contracts or an exempt person whose exemption covers that activity.

31/10/2004

Part XX exemption: entering into and administering a regulated mortgage contract

AUTH App 4.14.6

Entering into a regulated mortgage contract and administering a regulated mortgage contract have both been specified in the Non-Exempt Activities Order. As an exception, a professional firm is allowed under the Part XX exemption to carry on these regulated activities if the firm is acting as a trustee or personal representative. But this is provided that the borrower is a beneficiary under the trust, will or intestacy.

31/10/2004

AUTH App 4.15

Mortgage activities carried on by 'packagers'

01/12/2004

Introduction

AUTH App 4.15.1

The term 'packagers' is used variously to describe a range of intermediaries and their different activities in the mortgage process. Depending on the nature of their activities, these intermediaries may carry on regulated mortgage activities. The regulated activities likely to be of most relevance are arranging (bringing about) or making arrangements with a view to regulated mortgage contracts (described in more detail at AUTH App 4.5) and advising on regulated mortgage contracts (described in more detail at AUTH App 4.6). It is important to note that it is the nature of the relevant activities and not an entity's own description of itself or its activities that will determine the need for authorisation. This section describes the activities of various types of 'packagers'.

31/10/2004

Mortgage Clubs (sometimes called mortgage wholesalers)

AUTH App 4.15.2

So-called 'mortgage clubs' or 'wholesalers' essentially act as a distribution function for lenders, providing information to intermediaries about current deals available from a range of lenders. They provide information (often through an electronic sourcing system) in a way that helps intermediaries search the market effectively and, as such, do not deal directly with individual borrowers. If only engaged in these activities and without direct contact with individual borrowers, in the FSA's view these entities are unlikely to carry on a regulated mortgage activity because they will not:

(1) arrange (bring about) regulated mortgage contracts; their involvement is too indirect to bring about the contract;

(2) make arrangements with a view to regulated mortgage contracts; borrowers will not be participating in the arrangements which they make; or

(3) advise on regulated mortgage contracts, because they provide information not advice and the information is, in any event, directed to intermediaries rather than borrowers.

31/10/2004

Mortgage packaging companies

AUTH App 4.15.3

So-called 'mortgage packaging companies' may undertake certain parts of the mortgage process for lenders on an outsourced basis, ensuring that a complete set of documentation is collated and sent to the lender. This might include receiving application forms from intermediaries, undertaking credit reference checks and instructing a valuer. Other activities might include a product placement service for other intermediaries who provide product advice or recommendations to their clients. In the FSA's view, mortgage packaging companies engaged in these activities are unlikely to be carrying on a regulated activity where they have no have no direct contact or contract with potential borrowers (for the reasons given in AUTH App 4.15.2 G).

31/10/2004

Broker packagers (sometimes called 'intermediary brokers')

AUTH App 4.15.4

The term 'broker packagers' is typically used to describe intermediaries who either market their services directly to borrowers or who offer other intermediaries a complete mortgage outsourcing service. They are often involved in the sales and advice process, including helping the borrower complete application forms. In the FSA's view, broker packagers carrying on these types of activity in direct contact with the borrower are likely to be carrying on the regulated activities of arranging (bringing about) and making arrangements with a view to regulated mortgage contracts. They may also be advising on regulated mortgage contracts depending on the circumstances.

31/10/2004

AUTH App 4.16

Mortgage activities and securitisation

01/12/2004

Introduction

AUTH App 4.16.1

It is common practice in the mortgage industry for the original lender which makes the loan to pass on ownership of the loan to a third party through securitisation. Securitisation transactions take different forms, but the essence is that the original lender sells the beneficial interest (with or without the legal interest) in a mortgage portfolio to a special purpose vehicle ('SPV'), which raises finance to pay for the portfolio by selling its own securities. The original lender may (or may not) retain the first legal charge on each mortgage in the portfolio. There may also be other parties to the transaction, for example a security trustee to whom the SPV in turn charges the portfolio. Invariably, the SPV will also appoint either the original lender or a third party to administer the portfolio on its behalf. This section discusses whether, on a typical securitisation transaction, a SPV (and similarly a security trustee) carries on a regulated mortgage activity.

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AUTH App 4.16.2

The government's intention behind the regulatory regime for mortgages was "to ensure that, at any one time, it would be possible for each mortgage to be linked to one and only one FSA authorised firm (with mortgage permission) to have the ongoing regulatory responsibility towards consumers" (HM Treasury, Regulating Mortgages, February 2002, paragraph 47). In other words, it should be possible to arrange a securitisation transaction so that the SPV and other third parties do not carry on regulated activities, so long as an authorised person (with appropriate permission) is involved.

31/10/2004

Entering into a regulated mortgage contract

AUTH App 4.16.3

A SPV does not carry on the regulated activity of entering into a regulated mortgage contract (or agreeing to do so), merely by acquiring the legal or beneficial interest in the contract from the original lender, or by providing funding to the original lender. If the contract is subsequently varied, a SPV should take care to avoid the original contract being replaced with a new regulated mortgage contract (see AUTH App 4.4.4 G and AUTH App 4.4.13 G). The original lender is, or course, likely to require authorisation.

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Administering, arranging and advising on a regulated mortgage contract

AUTH App 4.16.4

If an unauthorised SPV arranges for an authorised person with permission to administer a regulated mortgage contract to administer its regulated mortgage contracts, it can avoid carrying on the regulated activities of:

(1) administering a regulated mortgage contact, because of the exclusion in article 62 of the Regulated Activities Order (described in AUTH App 4.8.4 G);

(2) arranging (bringing about) or making arrangements with a view to regulated mortgage contracts, because any arrangements that may be made by the authorised person in administering the contract are excluded, for the SPV, by article 29A of the Regulated Activities Order (referred to at AUTH App 4.5.9 G); in addition, making the original securitisation arrangements is unlikely to be a regulated activity, as it is unlikely to "bring about" the entering into of the contract and the borrower is unlikely to participate in the arrangements;

(3) advising on regulated mortgage contracts, because any advice given by the authorised person in administering the contract is excluded, for the SPV, by article 54A of the Regulated Activities Order (referred to at AUTH App 4.6.28 G); and

(4) agreeing to carry on any of the activities in (1) to (3) because agreeing to carry on an activity is only a regulated activity if the activity to be carried on would itself be a regulated activity.

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AUTH App 4.17

Interaction with the Consumer Credit Act

01/12/2004

Entering into and administering a regulated mortgage contract

AUTH App 4.17.1

Article 90 of the Regulated Activities Order essentially carves out regulated mortgage contracts from regulation under the Consumer Credit Act 1974 (CCA). Many loans that fall within the regulated mortgage contract definition are already exempt from much of the detail required under the CCA.

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AUTH App 4.17.2

Some loans that will fall within the regulated mortgage contract definition are also currently classified as regulated agreements under the CCA. In these cases, the impact of the carve-out in article 90 of the Regulated Activities Order is likely to be more significant. In particular, most of the CCA controls in respect of entering into, operation and termination of agreements will not apply. Article 90 also, however, provides that section 126 of the CCA (Enforcement of land mortgages) and other provisions relating to it, apply to agreements which would otherwise be regulated agreements. In the FSA's view, it follows that section 126 of the CCA and related provisions including sections 129, 130, 131, 135 and 136 (dealing amongst other things with extension of time and protection of property pending proceedings) will apply to these regulated mortgage contracts.

31/10/2004

AUTH App 4.17.3

Regulated mortgage contracts in place at 31 October 2004 which are subject to the CCA will remain subject to that regime and will not be brought within the FSA's remit. But there may be instances where a variation of an existing contract amounts to entering into a new regulated mortgage contract (see AUTH App 4.4.4 G and AUTH App 4.4.13 G).

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AUTH App 4.17.4

Unsecured loans, as well as loans secured on second charges on property, are not subject to the article 90 carve-out. Many of these loans are currently covered by the CCA and the position will not change.

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AUTH App 4.17.5

In some cases, lenders may provide a flexible mortgage product comprising both a secured first charge loan and unsecured borrowing, for example credit card facilities. In this example, in addition to considering the need for authorisation, the lender will also require a CCA licence in respect of the unsecured lending, even where the product is sold under a single agreement.

31/10/2004

Advising on and arranging a regulated mortgage contract

AUTH App 4.17.6

The CCA also regulates persons who carry on certain types of ancillary credit business including "credit brokerage", "debt-adjusting" and "debtcounselling", as defined by section 145 of the CCA. One aspect of the CCA regime is that a licence is required for these activities. Article 20 of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.1) Order 2003 adds new exceptions to section 145 of the CCA in relation to these activities.

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AUTH App 4.17.7

Article 20(2) amends section 146 of the CCA (Exceptions from section 145) so that it is not "credit brokerage" for a person to introduce an individual seeking to obtain credit if the introduction is made (a) to an authorised person who has permission to enter as lender into "relevant agreements"; or (b) to a "qualifying broker", with a view to that individual obtaining credit under a "relevant agreement".

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AUTH App 4.17.8

Amended section 146 of the CCA defines "relevant agreement" as meaning a consumer credit agreement secured by a land mortgage, where entering into that agreement as lender is a regulated activity. "Qualifying broker" is defined in the same section as meaning a person who may effect introductions of the kind mentioned in AUTH App 4.17.7 G without contravening the general prohibition under section 19 of the Act. "Credit brokerage" itself includes introducing an individual seeking to obtain credit to finance the acquisition of a dwelling to be occupied by himself or his relatives, to any person carrying on a business in the course of which he provides credit secured on land (for full definition see section 145(2) of the CCA).

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AUTH App 4.17.9

In addition to the provisions of the exception under amended section 146 of the CCA, introducers are referred to the guidance in AUTH App 4.5.10 G dealing with the provisions relating to introducing in the Regulated Activities Order.

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AUTH App 4.17.10

Article 20(2) amends section 146 of the CCA by providing that it is not "debt adjusting" to carry on an activity which would otherwise be "debt adjusting" under section 146(5) of the CCA if (a) the debt in question is due under a "relevant agreement"; and (b) that activity constitutes a regulated activity. "Debt adjusting" includes in relation to debts due under consumer credit agreements (a) negotiating with the creditor, on behalf of the debtor, terms for discharge of the debt, or (b) taking over, in return for payments by the debtor, his obligation to discharge a debt, or (c) any similar activity concerned with the liquidation of the debt (see full definition in section 145(5) of the CCA).

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AUTH App 4.17.11

In addition to the provisions of the exception under amended section 146 of the CCA, debt adjusters and arrangers are referred to the guidance in AUTH App 4.5 dealing with the provisions relating to arranging and, in particular, AUTH App 4.5.1 G (1)(b) dealing with varying a regulated mortgage contract.

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AUTH App 4.17.12

Article 20(2) amends section 146 CCA by providing that it is not "debtcounselling" for a person to give advice to debtors if (a) the debt in question is due under a "relevant agreement"; and (b) giving that advice constitutes a regulated activity. "Debt-counselling" includes the giving of advice to debtors about the liquidation of debts due under consumer credit agreements (see the full definition in section 145(6) of the CCA).

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AUTH App 4.17.13

In addition to the provisions of the exception under amended section 146 of the CCA, debt counsellors and advisers are referred to the guidance in AUTH App 4.6 dealing with advising on regulated mortgage contracts and, in particular, AUTH App 4.6 (Definition of 'advising on regulated mortgage contracts') dealing with varying a regulated mortgage contract.

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AUTH App 4.17.14

The CCA's licensing regime will still apply to credit brokers, debt adjusters and debt counsellors in respect of non-regulated mortgages and other loans, as well as to authorised persons or appointed representatives who carry on ancillary credit business in addition to regulated activities. Accordingly, mortgage intermediaries requiring authorisation may also need to retain their CCA licences.

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Financial Promotion and advertisements

AUTH App 4.17.15

Articles 90 and 91 of the Regulated Activities Order include provisions that have the effect of removing from CCA regulation financial promotions about qualifying credit. Such promotions will not, therefore, be subject to Part IV of the CCA or regulations made under that Part.

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AUTH App 4.17.16

For more detailed guidance concerning the interface between the financial promotion regime and the regulation of credit advertisements under the CCA, see AUTH App 1.17.17 G.

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AUTH App 4.18

Regulated activities related to mortgages: flowchart

01/12/2004

AUTH App 4.18.1

Do you need authorisation?

31/10/2004

AUTH App 5

Guidance on Insurance Mediation Activities

AUTH App 5.1

Application and purpose

01/12/2004

Application

AUTH App 5.1.1

This appendix applies principally to any person who needs to know whether he carries on insurance mediation activities and is thereby subject to FSA regulation. As such it will be of relevance among others to:

(1) insurance brokers;

(2) insurance advisers;

(3) insurance undertakings; and

(4) other persons involved in the sale and administration of contracts of insurance, even where these activities are secondary to their main business.

01/08/2004

Purpose of guidance

AUTH App 5.1.2

With effect from 14 January 2005 certain pre-contractual sales and post-contractual administration activities relating to contracts of insurance will become regulated by the FSA for the first time as part of the implementation by the United Kingdom of the Insurance Mediation Directive (IMD).

01/08/2004

AUTH App 5.1.3

The insurance mediation activities apply to all contracts of insurance, but the implementation of the IMD brings the mediation of general insurance contracts and pure protection contracts within the scope of FSA regulation for the first time.

01/08/2004

AUTH App 5.1.4

The FSA already regulates certain activities carried on by intermediaries in relation to life policies (see the guidance contained in AUTH 2 (Authorisation and regulated activities)). However, the changes to FSA regulation in force from 14 January 2005 will also potentially affect the regulatory position of firms already carrying on regulated activities in connection with life policies including insurers. These firms should therefore consider whether or not they need to apply for a variation of their Part IV permission.

01/08/2004

AUTH App 5.1.5

Insurance mediation activities will typically be carried out by insurance and reinsurance brokers, financial advisers, agents, consultants and outsourcers. In addition, persons whose principal business is not insurance mediation may also carry on these activities and will need to consider whether they require authorisation or can benefit from an exclusion or exemption.

01/08/2004

AUTH App 5.1.6

The purpose of this guidance is to help persons consider whether they need authorisation or a variation of their Part IV permission. Businesses new to regulation who act only as introducers of insurance business are directed in particular to AUTH App 5.6.2 G (Article 25(1): arranging (bringing about) deals in investments) to AUTH App 5.6.9 G (Exclusion: article 72C provision of information on an incidental basis) and AUTH App 5.15.6 G (Flow chart: introducers) to help consider whether they require authorisation. This guidance also explains the availability to persons carrying on insurance mediation activities of certain exemptions from FSA regulation, including the possibility of becoming an appointed representative (see AUTH App 5.13.1 G to AUTH App 5.13.6 G (Appointed representatives)).

01/08/2004

Effect of guidance

AUTH App 5.1.7

01/08/2004

AUTH App 5.1.8

Rights conferred on third parties cannot be affected by guidance given by the FSA. This guidance represents the FSA's view, and does not bind the courts, for example, in relation to the enforceability of a contract where there has been a breach of the general prohibition on carrying on a regulated activity in theUnited Kingdom without authorisation (see sections 26 to 29 of the Act (Enforceability of Agreements)).

01/08/2004

AUTH App 5.1.9

A person reading this guidance should refer to the Act and the various Orders that are referred to in this guidance. These should be used to find out the precise scope and effect of any particular provision referred to in this guidance. A person may need to seek his own legal advice.

01/08/2004

AUTH App 5.1.10

The text in AUTH App 5.1.2 G to AUTH App 5.1.6 G, AUTH App 5.2.6 G, AUTH App 5.11.2 G, AUTH App 5.13.5 G and AUTH App 5.13.6 G relates only to the period prior to the implementation of the Insurance Mediation Directive, that is before 14 January 2005.

01/08/2004

Guidance on other activities

AUTH App 5.1.11

A person may wish to carry on activities related to other forms of investment in connection with contracts of insurance, such as advising on and arranging regulated mortgage contracts. Such a person should also consult the guidance in AUTH 2 (Authorisation and Regulated Activities), AUTH App 1 (Financial Promotion and Related Activities) and AUTH App 4 (Regulated activities connected with mortgages).

01/08/2004

AUTH App 5.2

Introduction

01/12/2004

AUTH App 5.2.1

This guidance is based on the statutory instruments made as part of implementing the IMD in the United Kingdom. This legislation includes the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2003 (SI 2003/1476), which amends among others the Regulated Activities Order, the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001 (SI 2003/1217), the Non-Exempt Activities Order and the Business Order. Other legislation that forms the basis of this guidance includes the Financial Services and Markets Act 2000 (Exemption) (Amendment) (No.2) Order 2003 (SI 2003/1675), the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2003 (SI 2003/1676) and the Insurance Mediation Directive (Miscellaneous Amendments) Regulations 2003 (SI 2003/1473). For ease of reference, references to the Regulated Activities Order below adopt the revised Regulated Activities Order numbering indicated in the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2003.

01/08/2004

Requirement for authorisation or exemption

AUTH App 5.2.2

Any person who carries on a regulated activity in the United Kingdom by way of business must either be an authorised person or exempt from the need for authorisation. Otherwise, the person commits a criminal offence and certain agreements may be unenforceable. AUTH 2.2 (Authorisation and regulated activities) has further guidance on these consequences. To be authorised, a person must either:

(1) hold a Part IV permission given by the FSA (see AUTH 1.3 (The Authorisation Manual) and AUTH 3 (Applications for Part IV Permission)); or

(2) qualify for authorisation (see AUTH 5 (Qualifying for Authorisation under the Act)); for example, if the person is an EEA firm or a Treaty firm.

01/08/2004

Questions to be considered to decide if authorisation is required

AUTH App 5.2.3

A person who is concerned to know whether his proposed insurance mediation activities may require authorisation will need to consider the following questions (these questions are a summary of the issues to be considered and have been reproduced, in slightly fuller form, in the flow chart in AUTH App 5.15.2 G (Flow chart: regulated activities related to insurance mediation - do you need authorisation?):

(1) will the activities relate to contracts of insurance (see AUTH App 5.3 (Contracts of insurance)?

(2) if so, will I be carrying on any insurance mediation activities (see AUTH App 5.5 (The regulated activities: dealing in contracts as agent) to AUTH App 5.11 (Other aspects of exclusions))?

(3) if so, will I be carrying on my activities by way of business (see AUTH App 5.4 (The business test))?

(4) if so, is there the necessary link with the United Kingdom (see AUTH App 5.12 (Link between activities and the United Kingdom))?

(5) if so, will any or all of my activities be excluded (see AUTH App 5.3.7 G (Connected contracts of insurance) to AUTH App 5.3.8 G (Large risks); AUTH App 5.6.5 G (Exclusion: article 72C provision of information on an incidental basis) to AUTH App 5.6.23 G (Other exclusions); AUTH App 5.7.7 G (Exclusions); AUTH App 5.8.24 G (Exclusion: periodical publications, broadcasts and web-sites) to AUTH App 5.8.26 G (Other exclusions); AUTH App 5.11 (Other aspects of exclusions) and AUTH App 5.12.9 G to AUTH App 5.12.10 G (Overseas persons))?

(6) if it is not the case that all of my activities are excluded, am I a professional firm whose activities are exempted under Part XX of the Act (see AUTH App 5.14.1 G to AUTH App 5.14.4 G (Professionals))?

(7) if not, am I exempt as an appointed representative (see AUTH App 5.13 (Appointed representatives))?

(8) if not, am I otherwise an exempt person (see AUTH App 5.14.5 G (Other exemptions))?

If a person gets as far as question (8) and the answer to that question is "no", that person requires authorisation and should refer to AUTH 3 (Application for Part IV Permission). The order of these questions considers firstly whether a person is carrying on insurance mediation activities before dealing separately with the questions "will I be carrying on my activities by way of business?" (3) and "if so, will any or all of my activities by excluded?" (5).

01/08/2004

AUTH App 5.2.4

It is recognised pursuant to section 22 of the Act that a person will not be carrying on regulated activities in the first instance, including insurance mediation activities, unless he is carrying on these activities by way of business. Similarly, where a person's activities are excluded he cannot, by definition, be carrying on regulated activities. To this extent, the content of the questions above does not follow the scheme of the Act. For ease of navigation, however, the questions are set out in an order and form designed to help persons consider more easily, and in turn, issues relating to:

(1) the new activities;

(2) the business test; and

(3) the exclusions.

01/08/2004

Approach to implementation of the IMD

AUTH App 5.2.5

The IMD imposes requirements upon EEA States relating to the regulation of insurance and reinsurance mediation. The IMD defines "insurance mediation" and "reinsurance mediation" as including the activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance and reinsurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim (the text of article 2.3 IMD is reproduced in full in AUTH App 5.16.2 G (Article 2.3 of the Insurance Mediation Directive)).

01/08/2004

AUTH App 5.2.6

The United Kingdom's approach to implementing the IMD by domestic legislation is, in part, through secondary legislation, which will apply pre-existing regulated activities (slightly amended) in the Regulated Activities Order to the component elements of the insurance mediation definition in the IMD (see AUTH App 5.2.5 G and the text of article 2.3 IMD in AUTH App 5.16.2 G (Article 2.3 of the Insurance Mediation Directive)).

01/08/2004

AUTH App 5.2.7

The effect of the IMD and its implementation described in AUTH App 5.2.5 G to AUTH App 5.2.6 G is to vary the application of the existing regulated activities set out in AUTH App 5.2.8 G (1) to (3), (5) and (6), principally by applying these regulated activities to general insurance contracts and pure protection contracts and by making changes to the application of the various exclusions to these regulated activities. These regulated activities apply prior to 14 January 2005 to qualifying contracts of insurance (as defined by article 3 of the Regulated Activities Order and referred to in the Handbook as life policies (which includes pension policies)). The legislation implementing the IMD also introduces a new regulated activity set out in AUTH App 5.2.8 G (4), which potentially applies to all contracts of insurance.

01/08/2004

AUTH App 5.2.8

It follows that each of the regulated activities below potentially apply to any contract of insurance:

(1) dealing in investments as agent (article 21 (Dealing in investments as agent));

(2) arranging (bringing about) deals in investments (article 25(1) (Arranging deals in investments));

(3) making arrangements with a view to transactions in investments (article 25(2) (Arranging deals in investments));

(4) assisting in the administration and performance of a contract of insurance (article 39A (Assisting in the administration and performance of a contract of insurance));

(5) advising on investments (article 53 (Advising on investments));

(6) agreeing to carry on any of the above regulated activities (article 64 (Agreeing to carry on specified types of activity)).

01/08/2004

AUTH App 5.2.9

It is the scope of the Regulated Activities Order rather than the IMD which will determine whether a person requires authorisation or exemption. However, the scope of the IMD is relevant to the application of certain exclusions under the Regulated Activities Order (see, for example, the commentary on article 67 in AUTH App 5.11.9 G (Activities carried on in the course of a profession or non-investment business)).

01/08/2004

Financial promotion

AUTH App 5.2.10

An unauthorised person who intends to carry on activities connected with contracts of insurance will need to comply with section 21 of the Act (Restrictions on financial promotion). This guidance does not cover financial promotions that relate to contracts of insurance. Persons should refer to the general guidance on financial promotion in AUTH App 1 (Financial promotion and related activities). (See in particular AUTH App 1.17 (Financial promotions concerning insurance mediation activities) for information on financial promotions that relate to insurance mediation activities.)

01/08/2004

AUTH App 5.3

Contracts of insurance

01/12/2004

AUTH App 5.3.1

A person who is concerned to know whether his proposed activities may require authorisation will wish to consider whether those activities relate to contracts of insurance or contracts of reinsurance, or to insurance business or reinsurance business, which is the business of effecting or carrying out contracts of insurance or reinsurance as principal.

01/08/2004

Definition

AUTH App 5.3.2

The Regulated Activities Order does not attempt an exhaustive definition of a 'contract of insurance'. Instead, article 3(1) of the order (Interpretation) makes some specific extensions and limitations to the general common law meaning of the concept. For example, article 3(1) expressly extends the concept to fidelity bonds and similar contracts of guarantee, which are not contracts of insurance at common law, and it excludes certain funeral plan contracts, which would generally be contracts of insurance at common law.

01/08/2004

AUTH App 5.3.3

One consequence of this is that common law judicial decisions about whether particular contracts amount to 'insurance' or their being effected or carried out amounts to 'insurance business' are relevant in defining the scope of the FSA's authorisation and regulatory activities.

01/08/2004

AUTH App 5.3.4

As with any other contract, a contract of insurance that is not effected by way of a deed will only be legally binding if, amongst other things, it is entered into for valuable consideration. Determining what amounts to sufficient consideration in any given case is a matter for the courts. In practice, however, the legal definition of consideration is very wide. In particular, just because a contract of insurance is 'free' in the colloquial sense does not mean that there is no consideration for it. In the vast majority of cases, therefore, 'free' insurance policies (such as policies that act as loss leaders for an insurance undertaking) will be binding contracts and will amount to specified investments and therefore be subject to FSA regulation.

01/08/2004

AUTH App 5.3.5

The Regulated Activities Order does not define a reinsurance contract. The essential elements of the common law description of a contract of insurance are also the essential elements of a reinsurance contract. Whilst the IMD addresses insurance and reinsurance separately, throughout this guidance the term 'contract of insurance' (italicised or otherwise) also applies to contracts of reinsurance.

01/08/2004

AUTH App 5.3.6

Guidance describing how the FSA identifies contracts of insurance is in AUTH App 6 (Guidance on the Identification of Contracts of Insurance).

01/08/2004

Connected contracts of insurance

AUTH App 5.3.7

Article 72B of the Regulated Activities Order (Activities carried on by a provider of relevant goods or services) excludes from FSA regulation certain regulated activities carried on by providers of non-motor goods and services related to travel in relation to contracts of insurance that satisfy a number of conditions. Details about the scope of this exclusion can be found at AUTH App 5.11.13 G to AUTH App 5.11.15 G (Activities carried on by a provider of relevant goods or services).

01/08/2004

Large risks

AUTH App 5.3.8

Large risks situated outside the EEA are also excluded (described in more detail at AUTH App 5.11.16 G (Large risks)). The location of the risk or commitment may be determined by reference to the EEA State in which the risk is situated, defined in article 2(d) of the Second Non-Life Directive (88/357/EEC) or the EEA State of the commitment, defined in article 1(1)(g) of the Consolidated Life Directive (2002/83/EC). Broadly put, this is:

(1) for insurance relating to buildings and/or their contents, the EEA State in which the property is situated;

(2) for insurance relating to vehicles, the EEA State of registration;

(3) for policies of four months or less duration covering travel or holiday risks, where the policy was taken out;

(4) in all other cases (including those determined by reference to the EEA State of the commitment), the EEA State where the policyholder has his habitual residence, or if the policyholder is a legal person, where his establishment, to which the contract relates, is situated.

01/08/2004

Specified investments

AUTH App 5.3.9

For an activity to be a regulated activity, it must be carried on in relation to 'specified investments' (see section 22 of the Act Regulated activities) and Part III of the Regulated Activities Order (Specified investments)). For the purposes of insurance mediation activity, specified investments include the following 'relevant investments' defined in article 3(1) of the Regulated Activities Order (Interpretation):

(1) rights under any contract of insurance (see article 75 (Contracts of insurance)); and

(2) rights to or interests in life policies (see article 89 (Rights to or interests in investments)).

'Relevant investments' is the term used in articles 21 (Dealing in investments as agent), 25 (Arranging deals in investments) and 53 (Advising on investments) of the Regulated Activities Order to help define the types of investment to which the activities in each of these articles relate.

01/08/2004

AUTH App 5.3.10

A person will have rights under a contract of insurance when he is a policyholder. The question of whether a person has rights under a contract of insurance may require careful consideration in the case of group policies (with reference to the Glossary definition of policyholder). In the case, in particular, of general insurance contracts and pure protection contracts, the existence or otherwise of rights under such policies may be relevant to whether a person is carrying on insurance mediation activities.

01/08/2004

AUTH App 5.3.11

A person may also have rights or interests in a life policy where he is not a policyholder, but this will again depend on the terms of the individual policy.

01/08/2004

AUTH App 5.4

The business test

01/12/2004

AUTH App 5.4.1

A person will only need authorisation or exemption if he is carrying on a regulated activity 'by way of business' (see section 22 of the Act (Regulated Activities)).

01/08/2004

AUTH App 5.4.2

There is power in the Act for the Treasury to specify the circumstances in which a person is or is not to be regarded as carrying on regulated activities by way of business. The Business Order has been made using this power (partly reflecting differences in the nature of the different activities). As such, the business test for insurance mediation activity is distinguished from the standard test for 'investment business' in article 3 of the Business Order. Under article 3(4) of the Business Order, a person is not to be regarded as carrying on by way of business any insurance mediation activity unless he takes up or pursues that activity for remuneration. Accordingly, there are two principal elements to the business test in the case of insurance mediation activities:

(1) does a person receive remuneration for these activities?

(2) if so, does he take up or pursue these activities by way of business?

01/08/2004

AUTH App 5.4.3

As regards AUTH App 5.4.2 G (1), the Business Order does not provide a definition of 'remuneration', but, in the FSA's view, it has a broad meaning and covers both monetary and non-monetary rewards. This is regardless of who makes them. For example, where a person pays discounted premiums for his own insurance needs in return for bringing other business to an insurance undertaking, the discount would amount to remuneration for the purposes of the Business Order. Remuneration can also take the form of an economic benefit which the person expects to receive as a result of carrying on insurance mediation activities. In the FSA's view, the remuneration does not have to be provided or identified separately from remuneration for other goods or services provided. Nor is there a minimum level of remuneration.

01/08/2004

AUTH App 5.4.4

As regards AUTH App 5.4.2 G (2), in the FSA's view, for a person to take up or pursue insurance mediation activity by way of business, he will usually need to be carrying on those activities with a degree of regularity. The person will also usually need to be carrying on the activities for commercial purposes. That is to say, he will normally be expecting to gain a direct financial benefit of some kind. Activities carried on out of friendship or for altruistic purposes will not normally amount to a business. However, in the FSA's view:

(1) it is not necessarily the case that services provided free of charge will not amount to a business; for example, advice (including advice available on a website) may be provided free of charge to potential policyholders but in the course of a business funded by commission payments; and

(2) the 'by way of business' test may very occasionally be satisfied by an activity undertaken on an isolated occasion (provided that the activity would be regarded as done 'by way of business' in other respects, for example, because of the size of reward received or its relevance to other business activities).

01/08/2004

AUTH App 5.4.5

It follows that whether or not any particular person is acting 'by way of business' for these purposes will depend on his individual circumstances. However, a typical example of where the applicable business test would be likely to be satisfied by someone whose main business is not insurance mediation activities, is where a person recommends or arranges specific insurance policies in the course of carrying on that other business and receives a fee or commission for doing so.

01/08/2004

AUTH App 5.4.6

Some typical examples of where the business test is unlikely to be satisfied, assuming that there is no direct financial benefit to the arranger, include:

(1) arrangements which are carried out by a person for himself, or for members of his family;

(2) where employers provide insurance benefits for staff;

(3) where affinity groups or clubs set up insurance benefits for members.

01/08/2004

AUTH App 5.4.7

AUTH App 5.4.8 G contains a table that summarises the main issues surrounding the business test as applied to insurance mediation activities and that may assist persons to determine whether they will need authorisation or exemption. The approach taken in the table involves identifying factors that, in the FSA's view, are likely to play a part in the analysis. Indicators are then given as to the significance of each factor to the person's circumstances. By analysing the indicators as a whole, a picture can be formed of the likely overall position. The table provides separate indicators for the two elements of remuneration and by way of business. As a person has to satisfy both elements, a clear overall indication against either element being satisfied should mean that the test is failed. This approach cannot be expected to provide a clear conclusion for everyone. But it should enable persons to assess the relevant aspects of their activities and to identify where changes could, if necessary, be made so as to make their position clearer. The person to whom the indicators are applied is referred to in the table as 'P'.

01/08/2004

AUTH App 5.4.8

Table: Carrying on insurance mediation activities 'for remuneration' and 'by way of business'

Carrying on insurance mediation activities 'for remuneration' and 'by way of business'

'For remuneration'

Factor

Indicators that P does not carry on activities "for remuneration"

Indicators that P does carry on activities "for remuneration"

Direct remuneration, whether received from the customer or the insurer/broker (cash or benefits in kind such as tickets to the opera, a reduction in other insurance premiums, a remission of a debt or any other benefit capable of being measured in money's worth)

P does not receive any direct remuneration specifically identified as a reward for his carrying on insurance mediation activities.

P receives direct remuneration specifically identified as being a reward for providing insurance mediation services.

Indirect remuneration (such as any form of economic benefit as may be explicitly or implicitly agreed between P and the insurer/broker or P's customer - including, for example, through the acceptance of P's terms and conditions or mutual recognition of the economic benefit that is likely to accrue to P). An indirect economic benefit can include expectation of making a profit of some kind as a result of carrying on insurance mediation activities as part of other services.

P does not obtain any form of indirect remuneration through an economic benefit other than one which is not likely to have a material effect on P's ability to make a profit from his other activities.

P obtains an economic benefit that:
(a) is explicitly or implicitly agreed between P and the insurer/broker or P's customer; and
(b) has the potential to go beyond mere cost recovery through fees or other benefits received for providing a package of services that includes insurance mediation activities but where no particular part of the fees is attributable to insurance mediation activities. This could include where insurance mediation activity are likely to:
• play a material part in the success of P's other business activities or in P's ability to make a profit from them; or
• provide P with a materially increased opportunity to provide other goods or services; or
• be a major selling point for P's other business activities; or
• be essential for P to provide other goods or services.
P charges his customers a greater amount for other goods or services than would be the case if P were not also carrying on insurance mediation activities for those customers and this:
• is explicitly or implicitly agreed between P and the insurer/broker or P's customer; and
• has the potential to go beyond mere cost recovery.

Recovery of costs

P receives no benefits of any kind (direct or indirect) in respect of his insurance mediation activities beyond the reimbursement of his actual costs incurred in carrying on the activity (including receipt by P of a sum equal to the insurance premium that P is to pass on to the insurer or broker).

P receives benefits of any kind (direct or indirect) in respect of his insurance mediation activities which go beyond the reimbursement of his actual costs incurred in carrying on the activity.

'By way of business'

Factor

Indicators that P does not carry on activities "by way of business"

Indicators that P does carry on activities "by way of business"

Regularity/ frequency

Involvement is one-off or infrequent (for instance, once or twice a year) provided that the transaction(s) is not of such size and importance that it is essential to the success of P's other business activities.
Transactions do not result from formal arrangements (for instance, occasional involvement purely as a result of an unsolicited approach).

Involvement is frequent (for instance, once a week).
Involvement is infrequent but the transactions are of such size or importance that they are essential to the success of P's other business activities.
P has formal arrangements which envisage transactions taking place on a regular basis over time (whether or not such transactions turn out in practice to be regular).

Holding out

P does not hold himself out as providing a professional service that includes insurance mediation activities (by professional is meant not the services of a layman).

P holds himself out as providing a professional service that includes insurance mediation activities.

Relevance to other activities/ business

Insurance mediation activities:
• have no relevance to P's other activities; or
• have some relevance but could easily be ceased without causing P any difficulty in carrying on his main activities; or
• would be unlikely to result in a material reduction in income from P's main activities if ceased

Insurance mediation activities:
• are essential to P in carrying on his main activities; or
• would cause a material disruption to P carrying on his main activities if ceased; or
• would be likely to reduce P's income by a material amount.

Commercial benefit

P receives no direct or indirect pecuniary or economic benefit.
P is a layman and acting in that capacity.
P would not obtain materially less income from his main activities if they did not include insurance mediation activities.

P receives a direct or indirect pecuniary or economic benefit from carrying on insurance mediation activities - such as a fee, a benefit in kind or the likelihood of materially enhanced sales of other goods or services that P provides.
P would obtain materially less income from his main activities if they did not include insurance mediation activities.

01/08/2004

AUTH App 5.5

The regulated activities: dealing in contracts as agent

01/12/2004

AUTH App 5.5.1

Article 21 of the Regulated Activities Order (Dealing in investments as agent) makes dealing in contracts of insurance as agent a regulated activity. The activity is defined in terms of buying, selling, subscribing for or underwriting contracts as agent, that is, on behalf of another. Examples include:

(1) where an intermediary, by accepting on the insurance undertaking's behalf to provide the insurance, commits an insurance undertaking to provide insurance for a prospective policyholder; or

(2) where the intermediary agrees, on behalf of a prospective policyholder, to buy an insurance policy.

01/08/2004

AUTH App 5.5.2

Intermediaries with delegated authority to bind insurance undertakings are likely to be dealing in investments as agent. It should be noted, in particular, that this is a regulated activity:

(1) whether or not any advice is given (see AUTH App 5.8 (The regulated activities: advising on contracts of insurance); and

(2) whether or not the intermediary deals through an authorised person (for example, where he instructs another agent who is an authorised person to enter into a contract of insurance on his client's behalf).

01/08/2004

AUTH App 5.5.3

There are also certain exclusions which are relevant to whether a person is carrying on the activity of dealing in investments as agent (see AUTH App 5.11 (Other aspects of exclusions)).

01/08/2004

AUTH App 5.6

The regulated activities: arranging deals in, and making arrangements with a view to transactions in, contracts of insurance

01/12/2004

AUTH App 5.6.1

Article 25 of the Regulated Activities Order (Arranging deals in investments) describes two types of regulated activities concerned with arranging deals in respect of contracts of insurance. These are:

(1) arranging (bringing about) deals in investments (article 25(1) (Arranging deals in investments));

(2) making arrangements with a view to transactions in investments (article 25(2) (Arranging deals in investments));

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Article 25(1): arranging (bringing about) deals in investments

AUTH App 5.6.2

The activity in article 25(1) is carried on only if the arrangements bring about, or would bring about, the transaction to which the arrangement relates. This is because of the exclusion in article 26 of the Regulated Activities Order (Arrangements not causing a deal) Article 26 excludes from article 25(1) arrangements which do not bring about or would not bring about the transaction to which the arrangements relate. In the FSA's view a person would bring about a contract of insurance if his involvement in the chain of events leading to the contract of insurance were important enough that, without it, there would be no policy. Examples of this type of activity would include negotiating the terms of the contract of insurance on behalf of the customer with the insurance undertaking and vice versa, or assisting in the completion of a proposal form and sending it to the insurance undertaking. Other examples include where an insurance undertaking enters into a contract of insurance as principal or an intermediary enters into a contract of insurance as agent.

01/08/2004

Article 25(2): making arrangements with a view to transactions in investments

AUTH App 5.6.3

The activity within article 25(2) contrasts with article 25(1) in that it is not limited by the requirement that the arrangements would bring about the transaction to which they relate.

01/08/2004

AUTH App 5.6.4

Article 25(2) may, for instance, include activities of persons who help potential policyholders fill in or check application forms in the context of ongoing arrangements between these persons and insurance undertakings. A further example of this activity would be a person introducing customers to an intermediary either for advice or to help arrange an insurance policy. The introduction might be oral or written. By contrast, the FSA considers that a mere passive display of literature advertising insurance (for example, leaving leaflets advertising insurance in a dentist's or vet's waiting room and doing no more) would not amount to the article 25(2) activity.

01/08/2004

Exclusion: article 72C (Provision of information on an incidental basis)

AUTH App 5.6.5

The Regulated Activities Order provides an important potential exclusion, however, for persons whose principal business is other than insurance mediation activities.

01/08/2004

AUTH App 5.6.6

In broad terms, article 72C of the Regulated Activities Order excludes from the activities of arranging and assisting in the administration and performance of a contract of insurance:

(1) activities that consist of the provision of information to the policyholder or potential policyholder;

(2) by a person carrying on any profession or business which does not otherwise consist of regulated activities;

(3) if the provision of information may reasonably be regarded as being incidental to that profession or business.

01/08/2004

AUTH App 5.6.7

In the FSA's view, 'incidental' in this context means that the activity must arise out of, be complementary to or otherwise be sufficiently closely connected with the profession or business. In other words, there must be an inherent link between the activity and the firm's main business. For example, introducing dental insurance may be incidental to a dentist's activities; introducing pet insurance would not be incidental to his activities. In addition, to be considered 'incidental', in the FSA's view, the activity must not amount to the carrying on of a business in its own right.

01/08/2004

AUTH App 5.6.8

This exclusion applies to a person whose profession or business does not otherwise consist of regulated activities. In the FSA's view, the fact that a person may carry on regulated activities in the course of the carrying on of a profession or business does not, of itself, mean that the profession or business consists of regulated activities. This is provided that the main focus of the profession or business does not involve regulated activities and that the regulated activities that are carried on arise in a way that is incidental and complementary to the carrying on of the profession or business. So, the exclusion may be of relevance to exempt professional firms. It might also, for example, be relied on by doctors, vets and dentists as well as many businesses in the non-financial sector, even if they have permission to carry on regulated activities or are appointed representatives. This is assuming that their activities for which they are seeking to use the exclusion in article 72C are limited to providing information in a way which is incidental to their main profession or business. The exclusion only extends to information given to the policyholder or potential policyholder and not to the insurance undertaking An intermediary who forwards a proposal form to an insurance undertaking would not be able to take the benefit of the exclusion. Similarly, where a person does more than provide information (for example, by helping a potential policyholder fill in an application form), he cannot take the benefit of this exclusion. Nor does it cover the activity of advising a customer under article 53 of the Regulated Activities Order (Advising on investments).

01/08/2004

AUTH App 5.6.9

The exclusion will be of assistance to introducers who would otherwise be carrying on the regulated activity of making arrangements with a view to transactions in investments (assuming, as mentioned in AUTH App 5.6.8 G, that they provide information only to policyholders or potential policyholders, and not to the intermediary or insurance undertaking to whom they introduce these policyholders or potential policyholders). In order to assist such introducers determine whether or not they are likely to require authorisation, a simplified flowchart is included in AUTH App 5.15.6 G (Flow chart: introducers). Introducers may also find the guidance at AUTH App 5.9.2 G (The regulated activities: agreeing to carry on a regulated activity) helpful. AUTH App 5.6.17 G (Exclusion from article 25(2) for introducing) has guidance to assist persons determine whether their introducing activities amount to making arrangements with a view to transactions in investments.

01/08/2004

Exclusion from article 25(2): arrangements enabling parties to communicate

AUTH App 5.6.10

Article 27 of the Regulated Activities Order (Enabling parties to communicate) contains an exclusion that applies to arrangements which might otherwise bring within article 25(2) those who merely provide the means by which one party to a transaction (or potential transaction) is able to communicate with other parties. Simply providing the means by which parties to a transaction (or potential transaction) are able to communicate with each other is excluded from article 25(2) only. This will ensure that persons such as internet service providers or telecommunications networks are excluded if all they do is provide communication facilities (and these would otherwise be considered to fall within article 25(2)).

01/08/2004

AUTH App 5.6.11

In the FSA's view, the crucial element of the exclusion in article 27 is the inclusion of the word 'merely'. When a publisher, broadcaster or internet website operator goes beyond what is necessary for him to provide his service of publishing, broadcasting or otherwise facilitating the issue of promotions, he may well bring himself within the scope of article 25(2). Further detailed guidance relating to the scope of the exclusion in article 27 is contained in AUTH 2.8.6 G(2) (Arranging deals in investments) and AUTH App 1.32.6 G to AUTH App 1.32.11 G (Arranging deals in investments).

01/08/2004

Exclusion from article 25(2): transactions to which the arranger is a party

AUTH App 5.6.12

Article 28 of the Regulated Activities Order (Arranging transactions to which the arranger is a party) excludes from the regulated activities in article 25(1) and 25(2) arrangements made for or with a view to contracts of insurance when:

(1) the person (P) making the arrangements is the only policyholder; or

(2) P, as a result of the transaction, would become the only policyholder.

01/08/2004

AUTH App 5.6.13

Market makers in traded endowment policies may be able to rely on this exclusion to avoid the need to be authorised. They must ensure, however, that where they are carrying on the regulated activity of dealing in investments as principal (article 14) they are also able to rely on the exclusions in articles 15 or 16 (see the guidance in AUTH 2.8.4 G (Dealing in investments as principal)).

01/08/2004

AUTH App 5.6.14

Insurance undertakings do not fall within the terms of this exclusion and so will be arranging contracts of insurance, in addition to effecting and carrying out contract of insurance.

01/08/2004

AUTH App 5.6.15

In some cases, a person may make arrangements to enter into a contract of insurance as policyholder on its own behalf and also arrange that another person become a policyholder under the same contract of insurance. If so, the person should be aware that the effect of the narrower exclusion in article 28 as part of implementation of the IMD is that he may be arranging on behalf of the other policyholder. This may be relevant, for example, to a company which arranges insurance for itself (not arranging) as well as other companies in a group or loan syndicate (potentially arranging).

01/08/2004

AUTH App 5.6.16

The restriction in the scope of article 28 raises an issue where there is a trust with co-trustees, where each trustee will be a policyholder with equal rights and obligations. If the activities of one of the trustees include arranging in respect of contracts of insurance, that trustee could be viewed as arranging on behalf of his co-trustees who will also be policyholders. Similar issues also arise in respect of trustees assisting in the administration and performance of a contract of insurance. The FSA is of the view, however, that trustees should not be regarded as carrying on regulated activities where they are acting as joint policyholders in arranging or assisting in the administration and performance of a contract of insurance. In this respect, trustees differ from policyholders under a group policy, where each person covered under the group policy may make claims on the policy in relation to his own risks. In that situation, a policyholder who is providing services to other policyholders of arranging or assisting in the administration and performance of a contract of insurance will be carrying on a regulated activity.

01/08/2004

Exclusion from article 25(2) for introducing

AUTH App 5.6.17

Article 33 of the Regulated Activities Order (Introducing) excludes arrangements which would otherwise fall under article 25(2) where:

(1) they are arrangements under which persons will be introduced to another person;

(2) the person to whom introductions are to be made is:

(a) an authorised person; or

(b) an exempt person acting in the course of business comprising a regulated activity in relation to which he is exempt; or

(c) a person who is not unlawfully carrying on regulated activities in the United Kingdom and whose ordinary business involves him in engaging in certain activities; and

(4) the arrangements do not relate to transactions relating to contracts of insurance.

01/08/2004

AUTH App 5.6.18

The effect of AUTH App 5.6.17 G (4) is that some persons who, in making introductions, are making arrangements with a view to transactions in investments under article 25(2) of the Regulated Activities Order, cannot use the introducing exclusion. This is if, in general terms, the arrangements for making introductions relate to contracts of insurance (AUTH App 5.6.19 G has further guidance on when arrangements for introductions may be regarded as relating to contracts of insurance). However, this does not mean that all introducers whose introductions relate directly or indirectly to contracts of insurance will necessarily require authorisation if they cannot use the exclusion in article 72C of the Regulated Activities Order for merely passing information. For this to be the case, a person must first be carrying on the business of making arrangements with a view to transactions in investments. In the FSA's view, the following points will be relevant in determining whether this is the case.

(1) Article 25(2) applies to ongoing arrangements made with a view to transactions taking place from time to time as a result of persons having taken part in the arrangements. So, they will not apply to one-off introductions or introductions that are not part of an ongoing pre-existing arrangement between introducer and introducee. An introducer who merely suggests to a person that he seeks advice or assistance from an authorised person or an exempt person with whom the introducer has no pre-existing agreement that anticipates introductions will be made, will not be making arrangements at all. He will simply be offering general advice or information.

(2) The purpose of the arrangements must be for the person who is introduced to, in general terms, enter into a transaction to buy or sell securities or relevant investments. So, arrangements for introducing persons for advice only will not be caught (for example, introductions to a financial planner or to the publisher of an investment newsletter). In other cases, it may be likely that transactions will be entered into following the provision of advice. Provided the introducer is completely indifferent as to whether or not a contract of insurance may ultimately be bought (or sold) as a result of the advice given to the person he has introduced, the introducer will not be making arrangements with a view to transactions in investments. This is likely to be the case where the introducer does not receive any pecuniary reward that is linked to the volume of business done as a result of his introductions.

01/08/2004

AUTH App 5.6.19

Where a person is making arrangements with a view to transactions in investments by way of making introductions, and he is not completely indifferent to whether or not transactions may result, it may still be the case that the exclusion in article 33 will apply. In the FSA's view, this is where:

(1) the introduction is for independent advice on investments generally; and

(2) the introducer is indifferent as to whether or not a contract of insurance may ultimately be bought (or sold) rather than any other type of investment.

This is because the arrangements for making introductions do not specifically relate to a contract of insurance or to any other type of investment but to investments generally. Whether or not a person is making arrangements for introductions for the purpose of the provision of independent advice on investments generally will depend on the facts in any particular case. But, in the FSA's view, it is very unlikely that article 33 could apply where introductions are made to a person for the purposes of that person giving advice on and then arranging general insurance.

01/08/2004

AUTH App 5.6.20

The table in AUTH App 5.6.21 G has examples of the application of article 33 to arrangements for making introductions.

01/08/2004

AUTH App 5.6.21

Application of article 33 to arrangements for making introductions. This table belongs to AUTH App 5.6.20 G.

Type of introduction

Applicability of exclusion

Introductions are purely for the purpose of the provision of independent advice - Introducer is completely indifferent to whether or not transactions take place after advice has been given.

Exclusion not relevant as introducer is not arranging under article 25(2).

Introduction is one-off or otherwise not part of pre-existing ongoing arrangements that envisage such introduction being made.

Exclusion not relevant as introducer is not arranging under article 25(2).

Introducer is not indifferent to whether or not transactions take place after advice has been given, but is indifferent to whether or not the transactions may involve a contract of insurance.

Exclusion will be available provided the introduction was made with a view to the provision of independent advice on investments generally.

Introducer is not indifferent to whether or not transactions take place after advice has been given (for example, because he expects to receive a percentage of the commission), and introductions specifically relate to contracts of insurance.

Exclusion is not available. If introducer is an unauthorised person, he will need authorisation or exemption as an designated investment business. If introducer is an authorised person (such as an IFA introducing to a general insurance broker), he will need to vary his Part IV permission accordingly. If introducer is an appointed representative, he will need to ensure that his agreement covers making such arrangements.

01/08/2004

Exclusion from article 25(2): arrangements for the provision of finance

AUTH App 5.6.22

An unauthorised person who makes arrangements with a view to a person who participates in the arrangements buying or selling contracts of insurance may be excluded from article 25(2) by article 32 of the Regulated Activities Order (Provision of finance). This is provided the sole purpose of the arrangements is the provision of finance to enable the person to buy the contract of insurance. Premium finance companies may be able to rely on this exclusion provided the arrangements they put in place, taken as a whole, have as their sole purpose the provision of finance to fund premiums.

01/08/2004

Other exclusions

AUTH App 5.6.23

The Regulated Activities Order contains some other exclusions which have the effect of narrowing or limiting the application of regulated activities within article 25 by preventing certain activities from amounting to regulated activities. These are referred to in AUTH App 5.11.8 G (Exclusions applying to more than one regulated activity).

01/08/2004

AUTH App 5.7

The regulated activities: assisting in the administration and performance of a contract of insurance

01/12/2004

AUTH App 5.7.1

The regulated activity of assisting in the administration and performance of a contract of insurance (article 39A) relates, in broad terms, to activities carried on by intermediaries after the conclusion of a contract of insurance and for or on behalf of policyholders, in particular in the event of a claim. Loss assessors acting on behalf of policyholders in the event of a claim are, therefore, likely in many cases to be carrying on this regulated activity. By contrast, claims management on behalf of certain insurers is not a regulated activity (see AUTH App 5.7.7 G (Exclusions)).

01/08/2004

AUTH App 5.7.2

Neither assisting in the administration nor assisting in the performance of a contract alone will fall within this activity. Generally, an activity will either amount to assisting in the administration or assisting in the performance but not both. Occasionally, however, an activity may amount to both assisting in the administration and performance of a contract of insurance. For example, where a person assists a claimant in filling in a claims form, in the FSA's view this amounts to assisting in the administration of a contract of insurance. In some instances, however, this may also amount to assisting in the performance of a contract of insurance. In the FSA's view, an example of when a person may be assisting in the performance of a contract is where a person fills in the whole or a significant part of a claims form on behalf of a claimant. This is because, by helping complete a claims form, a person may be assisting the policyholder to perform his contractual obligation to notify the insurance undertaking in the event of a claim and provide details of the claim in the manner and form required by the contract.

01/08/2004

AUTH App 5.7.3

Put another way, where an intermediary's assistance in filling in a claims form is material to whether performance takes place of the contractual obligation to notify claims, it is more likely to amount to assisting in the administration and performance of a contract of insurance. Conversely, in the FSA's view, a person who merely gives pointers about how to fill in the claims form or merely supplies information in support of a claim will not be assisting in the performance of a contract of insurance. Instead, the person will only be facilitating rather than assisting in the performance of a contract of insurance.

01/08/2004

AUTH App 5.7.4

More generally, an example of an activity that, in the FSA's view, is likely to amount to assisting a policyholder in both the administration and the performance of a contract of insurance is notifying a claim under a policy and then providing evidence in support of the claim, or helping negotiate its settlement on the policyholder's behalf. Notifying an insurance undertaking of a claim assists the policyholder in discharging his contractual obligation to do so (assisting in the performance); providing evidence in support of the claim or negotiating its settlement assists management of the claim (assisting in the administration).

01/08/2004

AUTH App 5.7.5

On the other hand, where a person does no more than advise a policyholder generally about making a claim or provide evidence in support of a claim, this is unlikely to amount to both assisting in the administration and performance. Similarly, the mere collection of premiums from policyholders is unlikely, without more, to amount to assisting in the administration and performance of a contract of insurance. The collection of premiums from customers or clients at the pre-contract stage, however, may amount to arranging (see example in AUTH App 5.15.4 G (Types of activity - are they regulated activities and, if so, why?)).

01/08/2004

AUTH App 5.7.6

Where a person receives funds on behalf of a policyholder in settlement of a claim, in the FSA's view, the act of receipt is likely to amount to assisting in the performance of a contract. By giving valid receipt, the person assists the insurance undertaking to discharge its contractual obligation to provide compensation to the policyholder. He may also be assisting the policyholder to discharge any obligations he may have under the contract to provide valid receipt of funds, upon settlement of a claim. Where a person provides valid receipt for funds received on behalf of the policyholder, he is also likely to be assisting in the administration of a contract of insurance (for example, making prior arrangements relating to transmission and receipt of payment).

01/08/2004

Exclusions

AUTH App 5.7.7

By article 39B of the Regulated Activities Order (Claims management on behalf of an insurer etc):

(1) loss adjusting on behalf of a relevant insurer (see AUTH App 5.7.8 G);

(2) expert appraisal; and

(3) managing claims for a relevant insurer;

are also excluded from the regulated activity of assisting in the administration and performance of a contract of insurance. This is where the activity is carried on in the course of carrying on any profession or business (see also AUTH App 5.14 (Exemptions)). In determining whether they are carrying on the regulated activity of assisting in the administration and performance of a contract of insurance, therefore, persons should consider whether they are acting on behalf of the relevant insurer and not the policyholder.

01/08/2004

AUTH App 5.7.8

A 'relevant insurer' for the purposes of article 39B means:

(1) an authorised person who has permission for effecting and carrying out contracts of insurance; or

(2) a member of the Society of Lloyd's or the members of the Society of Lloyd's taken together; or

(3) an EEA firm that is an insurer; or

(4) a reinsurer, being a person whose main business consists of accepting risks ceded by a person falling under (1), (2) or (3) or a person who is established outside the United Kingdom and who carries on the activity of effecting and carrying out contracts of insurance.

So, a person whose activities are excluded under article 12 of the Regulated Activities Order (Breakdown insurance) will not be a relevant insurer for these purposes and any person who performs loss adjusting or claims management on behalf of such a person will not be able to use the exclusion in article 39B.

01/08/2004

AUTH App 5.8

The regulated activities: advising on contracts of insurance

01/12/2004

AUTH App 5.8.1

Article 53 of the Regulated Activities Order (Advising on Investments) makes advising on contracts of insurance a regulated activity. This covers advice which is both:

(1) given to a person in his capacity as an insured or potential insured, or as agent for an insured or a potential insured; and

(2) advice on the merits of the insured or his agent:

(a) buying, selling, subscribing for or underwriting a particular contract of insurance; or

(b) exercising any right conferred by a contract of insurance to buy, sell, subscribe for or underwrite a contract of insurance.

01/08/2004

AUTH App 5.8.2

For advice to fall within article 53, it must:

(1) relate to a particular contract of insurance (that is, one that a person may enter into);

(2) be given to a person in his capacity as an investor or potential investor;

(3) be advice (that is, not just information); and

(4) relate to the merits of a person buying, selling, subscribing for or underwriting (or exercising any right to do so) a contract of insurance or rights to or interests in life policies.

01/08/2004

AUTH App 5.8.3

Each of these aspects is considered in greater detail in the table in AUTH App 5.8.5 G. Where an activity is identified as not amounting to advising on investments it could still form part of another regulated activity. This will depend upon whether a person's activities, viewed as a whole, amount to arranging. Additionally, it should be borne in mind that the provision of advice or information may involve the communication of a financial promotion (see AUTH App 1 (Financial promotion and related activities)).

01/08/2004

Advice must relate to a particular contract of insurance

AUTH App 5.8.4

Advice about contracts of insurance will come within the regulated activity in article 53 of the Regulated Activities Order only if it relates to a particular contract of insurance. So, generic or general advice will not fall under article 53. In particular:

(1) advice would come within article 53 if it took the form of a recommendation that a person should buy the ABC Insurers motor insurance;

(2) advice would not relate to a particular contract if it consists of a recommendation only that a person should take out insurance of a particular class without identifying any particular insurance undertaking, or with ABC Insurers provided that the kind of insurance is not specified (either expressly or by implication): a recommendation only that a person should buy insurance from ABC Insurers could amount to advice if a specific insurance policy would be implied from the context;

(3) the table in AUTH App 5.8.5 G identifies several typical recommendations and indicates whether they will be regarded as advice under article 53.

01/08/2004

AUTH App 5.8.5

Typical recommendations and whether they will be regulated as advice on contracts of insurance under article 53 of the Regulated Activities Order. This table belongs to AUTH App 5.8.4 G

Recommendation

Regulated under article 53 or not?

I recommend you take the ABC Insurers motor insurance policy

Yes

I recommend that you take out the GHI Insurers life insurance policy

Yes

I recommend that you do not take out the ABC Insurers motor insurance policy

Yes

I recommend that you do not take out the GHI Insurers life insurance policy

Yes

I recommend that you take out either the ABC Insurers motor insurance policy or the DEF Insurers motor insurance policy

Yes

I recommend that you take out either the GHI Insurers life insurance policy or the JKL Insurers life insurance policy

Yes

I recommend that you take out (or do not take out) insurance with ABC Insurers

Possibly (depending on whether or not the circumstances relating to the recommendation, including the range of possible products, is such that this amounts to an implied recommendation of a particular policy)

I recommend that you take out (or do not take out) contents insurance

No, unless a specific insurance policy is implied by the context

I recommend that you take out (or do not take out) life insurance

No, unless a specific insurance policy is implied by the context

01/08/2004

Advice given to a person in his capacity as an investor or potential investor

AUTH App 5.8.6

For the purposes of article 53, advice must be given to a person in his capacity as an investor or potential investor (which, in the context of contracts of insurance, will mean as policyholder or potential policyholder). So, article 53 will not apply where advice is given to persons who receive it as:

(1) an adviser who will use it only to inform advice given by him to others; or

(2) a journalist or broadcaster who will use it only for journalistic purposes.

01/08/2004

AUTH App 5.8.7

Advice will still be covered by article 53 even though it may not be given to any particular policyholder (for example, advice given in a periodical publication or on a website).

01/08/2004

Advice or information

AUTH App 5.8.8

01/08/2004

AUTH App 5.8.9

In general terms, simply giving information, without making any comment or value judgement on its relevance to decisions which a person may make, is not advice. In this respect, it is irrelevant that a person may be providing information on a single contract of insurance or on two or more. This means that a person may provide information on a single contract of insurance without necessarily being regarded as giving advice on it. AUTH App 5.8.11 G has guidance on the circumstances in which information can assume the form of advice.

01/08/2004

AUTH App 5.8.10

In the case of article 53, information relating to buying or selling contracts of insurance may often involve one or more of the following:

(1) an explanation of the terms and conditions of a contract of insurance whether given orally or in writing or by providing leaflets and brochures;

(2) a comparison of the features and benefits of one contract of insurance compared to another;

(3) the production of pre-purchase questions for a person to use in order to exclude options that would fail to meet his requirements; such questions may often go on to identify a range of contracts of insurance with characteristics that appear to meet the person's requirements and to which he might wish to give detailed consideration (pre-purchase questioning is considered in more detail in AUTH App 5.8.15 G to AUTH App 5.8.19 G (Pre-purchase questioning (including decision trees));

(4) tables that compare the costs and other features of different contracts of insurance;

(5) leaflets or illustrations that help persons to decide which type of contract of insurance to take out;

(6) the provision, in response to a request from a person who has identified the main features of the type of contract of insurance he seeks, of several leaflets together with an indication that all the contracts of insurance described in them have those features.

01/08/2004

AUTH App 5.8.11

In the FSA's opinion, however, such information is likely to take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation. Examples of situations where information provided by a person (P) might take the form of advice are given below.

(1) P may provide information on a selected, rather than balanced and neutral, basis that would tend to influence the decision of a person. This may arise where P offers to provide information about contracts of insurance that contain features specified by the person, but then exercises discretion as to which complying contract of insurance to offer to that person.

(2) P may, as a result of going through the sales process, discuss the merits of one contract of insurance over another, resulting in advice to enter into a particular one. In contrast, advice on how to complete an application form, without an explicit or implicit recommendation on the merits of buying or selling the contract of insurance whilst 'advice' in the general sense of the word, is not, in the view of the FSA, advice within the meaning of article 53. Such advice may, however, amount to arranging (for which see AUTH App 5.6.1 G to AUTH App 5.6.4 G (The regulated activities: arranging deals in, and making arrangements with a view to transactions in, contracts of insurance)).

01/08/2004

Advice must relate to the merits (of buying or selling a contract of insurance)

AUTH App 5.8.12

Advice under article 53 relates to the advantages and disadvantages of buying, selling, subscribing for or underwriting a particular contract of insurance. It is worth noting that, in this context, 'buying' and 'selling' are defined widely under article 3 of the Regulated Activities Order (Interpretation). 'Buying' includes acquiring for valuable consideration, and 'selling' includes surrendering, assigning or converting rights under a contract of insurance.

01/08/2004

AUTH App 5.8.13

The requirements imposed by the IMD (see AUTH App 5.2.5 G (Approach to implementation of the IMD) and the text of article 2.3 IMD in AUTH App 5.16.1 G (Article 2.3 of the Insurance Mediation Directive) are narrower than the scope of the Regulated Activities Order (see AUTH App 5.2.7 G (Approach to implementation of the IMD)). This is that, unlike the Regulated Activities Order, they do not relate to the assignment of contracts of insurance. This is of relevance to, amongst others, persons involved in the 'second-hand' market for contracts of insurance such as traded endowment policies and certain viatical instruments (that is, arrangements by which a terminally ill person can obtain value from his life policy) (see also AUTH App 5.6.12 G (Exclusion from article 25(2): transactions to which the arranger is a party). Persons advising on or arranging assignments of these contracts of insurance are therefore potentially carrying on regulated activities although they may be able to take the benefit of article 67 of the Regulated Activities Order (Activities carried on in the course of a profession or non-investment business) in certain circumstances (see AUTH App 5.11.9 G to AUTH App 5.11.12 G (Activities carried on in the course of a profession or non-investment business)).

01/08/2004

AUTH App 5.8.14

Generally speaking, advice on the merits of using a particular insurance undertaking, broker or adviser in their capacity as such, does not amount to advice for the purpose of article 53. It is not advice on the merits of buying or selling a particular contract of insurance (unless, in the circumstances, the advice amounts to an implied recommendation of a particular policy).

01/08/2004

Pre-purchase questioning (including decision trees)

AUTH App 5.8.15

Pre-purchase questioning involves putting a sequence of questions in order to extract information from a person with a view to facilitating the selection by that person of a contract of insurance or other product that meets his needs. A decision tree is an example of pre-purchase questioning. The process of going through the questions will usually narrow down the range of options that are available.

01/08/2004

AUTH App 5.8.16

A key issue for those firms proposing to use pre-purchase questioning is whether the specific questioning used may amount to advice. There are two main aspects:

(1) advice must relate to a particular contract of insurance (see AUTH App 5.8.4 G (Advice must relate to a particular contract of insurance)); and

(2) the distinction between information and advice (see AUTH App 5.8.8 G to AUTH App 5.8.11 G (Advice or information)).

Whether or not pre-purchase questioning in any particular case is advising on contracts of insurance will depend on all the circumstances. The process may involve identifying one or more particular contracts of insurance. If so, to avoid advising on contracts of insurance, the critical factor is likely to be whether the process is limited to, and likely to be perceived by the person as, assisting the person to make his own choice of product which has particular features which the person regards as important. The questioner will need to avoid providing any judgement on the suitability of one or more products for that person and in this respect should have regard to the factors set out in AUTH App 5.8.2 G to AUTH App 5.8.4 G (Advice must relate to a particular contract of insurance) and the table in AUTH App 5.8.5 G. See also AUTH App 5.8.12 G to AUTH App 5.8.14 G (Advice must relate to the merits (of buying or selling a contract of insurance)) for other matters that may be relevant.

01/08/2004

AUTH App 5.8.17

The potential for variation in the form, content and manner of prepurchase questioning is considerable, but there are two broad types. The first type involves providing questions and answers which are confined to factual matters (for example, the amount of the cover). In the FSA's view, this does not itself amount to advising on contracts of insurance, if it involves the provision of information rather than advice. There are various possible scenarios, including the following:

(1) the questioner may go on to identify one or more particular contracts of insurance which match features identified by the pre-purchase questioning; provided these are selected in a balanced and neutral way (for example, they identify all the matching contracts of insurance available without making a recommendation as to a particular one) this need not involve advising on contracts of insurance;

(2) the questioner may go on to advise a person on the merits of one particular contract of insurance over another; this would be advising on contracts of insurance.

01/08/2004

AUTH App 5.8.18

The second type of pre-purchase questioning involves providing questions and answers incorporating opinion, judgement or recommendation. There are various possible scenarios, including the following:

(1) the pre-purchase questioning may not lead to the identification of any particular contract of insurance; in this case, the questioner has provided advice, but it is generic advice and does not amount to advising on contracts of insurance;

(2) the pre-purchase questioning may lead to the identification of one or more particular contracts of insurance; the key issue then is whether the advice can be said to relate to a particular contract of insurance (see further AUTH App 5.8.4 G (Advice must relate to a particular contract of insurance)).

01/08/2004

AUTH App 5.8.19

In the case of AUTH App 5.8.18 G(2) and similar scenarios, the FSA considers that it is necessary to look at the process and outcome of prepurchase questioning as a whole. It may be that the element of advice incorporated in the questioning can properly be viewed as generic advice if it were considered in isolation. But although the actual advice may be generic, the process has ended in identifying one or more particular contracts of insurance. The combination of the generic advice and the identification of a particular or several particular contracts of insurance to which it leads may well, in the FSA's view, cause the questioner to be advising on contracts of insurance. Factors that may be relevant in deciding whether the process involves advising on contracts of insurance may include:

(1) any representations made by the questioner at the start of the questioning relating to the service he is to provide;

(2) the context in which the questioning takes place;

(3) the stage in the questioning at which the opinion is offered and is significant;

(4) the role played by the questioner who guides a person through the pre-purchase questions;

(5) the outcome of the questioning (whether particular contracts of insurance are highlighted, how many of them, who provides them, their relationship to the questioner and so on);

(6) whether the pre-purchase questions and answers have been provided by, and are clearly the responsibility of, an unconnected third party, and all that the questioner has done is help the person understand what the questions or options are and how to determine which option applies to his particular circumstances.

01/08/2004

Medium used to give advice

AUTH App 5.8.20

With the exception of:

(1) periodicals, broadcasts and other news or information services (see AUTH App 5.8.24 G to AUTH App 5.8.25 G (Exclusion: periodical publications, broadcasts and web-sites)); and

(2) situations involving an overseas element (see, generally, AUTH App 5.12 (Link between activities and the United Kingdom) and, in particular, AUTH App 5.12.8 G (Where is insurance mediation carried on?));

The use of the medium itself to give advice should make no material difference to whether or not the advice is caught by article 53.

01/08/2004

AUTH App 5.8.21

Advice can be provided in many ways including:

(1) face to face;

(2) orally to a group;

(3) by telephone;

(4) by correspondence (including e-mail);

(5) in a publication, broadcast or web-site; and

(6) through the provision of an interactive software system.

01/08/2004

AUTH App 5.8.22

Taking electronic commerce as an example, the use of electronic decision trees does not present any novel problem. The same principles apply as with a paper version (see AUTH App 5.8.15 G to AUTH App 5.8.19 G (Prepurchase questioning (including decision trees))).

01/08/2004

AUTH App 5.8.23

Advice in publications, broadcasts and web-sites is subject to a special regime (see AUTH App 5.8.24 G (Exclusion: periodical publications, broadcasts and web-sites) and AUTH 7 (Periodical publications, news services and broadcasts: applications for certification).

01/08/2004

Exclusion: periodical publications, broadcasts and web-sites

AUTH App 5.8.24

An important exclusion from advising on contracts of insurance relates to advice given in periodical publications, regularly updated news and information services and broadcasts (article 54 of the Regulated Activities Order (Advice given in newspapers etc)). The exclusion applies if the principal purpose of the publication or service taken as a whole (including any advertising content) is neither to give advice of a kind mentioned in article 53 (Advising on investments) or article 53A (Advising on regulated mortgage activities) nor to lead or enable persons to buy, sell, subscribe for or underwrite relevant investments or, as borrower, to enter into or vary the terms of a regulated mortgage contract.

01/08/2004

AUTH App 5.8.25

This is explained in greater detail, together with the provisions on the granting of certificates by the FSA on the application of the proprietor of a periodical publication or news or information service or broadcast, in AUTH 7 (Periodical publications, news services and broadcasts: applications for certification).

01/08/2004

Other exclusions

AUTH App 5.8.26

The Regulated Activities Order contains other limited exclusions which have the effect of preventing certain activities from amounting to advice on contracts of insurance. These are referred to in AUTH App 5.11.8 G (Exclusions applying to more than one regulated activity) to AUTH App 5.11.16 G (Large risks).

01/08/2004

AUTH App 5.9

The Regulated Activities: agreeing to carry on a regulated activity

01/12/2004

AUTH App 5.9.1

Under article 64 of the Regulated Activities Order (Agreeing to carry on specified kinds of activity), in addition to the regulated activities of:

(1) dealing in investments as agent;

(2) arranging (bringing about) deals in investments;

(3) making arrangements with a view to transactions in investments;

(4) assisting in the administration and performance of a contract of insurance; and

(5) advising on investments;

agreeing to do any of these things is itself a regulated activity. In the FSA's opinion, this activity concerns the entering into of a legally binding agreement to provide the services to which the agreement relates. So, a person is not carrying on a regulated activity under article 64 merely because he makes an offer to do so.

01/08/2004

AUTH App 5.9.2

To the extent that an exclusion applies in relation to a regulated activity, 'agreeing' to carry on an activity within the exclusion will not be a regulated activity. This is the effect of article 4(3) of the Regulated Activities Order (Specified activities: general). So, for example, a vet can, without carrying on a regulated activity, enter into an agreement with an insurance undertaking to distribute marketing literature provided that the vet can rely on the exclusion in article 72C (Provision of information on an incidental basis) in relation to the activity of distributing the literature (see also AUTH App 5.6.6 G and AUTH App 5.6.9 G (Exclusion: article 72C (Provision of information on an incidental basis))). However, to be able to rely on the exclusion in article 72C, the vet must not be viewed as providing information to the insurance undertaking. More specifically, an unauthorised introducer can enter into standing arrangements with insurance undertakings or brokers to make introductions, provided that these arrangements do not envisage subsequent provision of information to these insurance undertakings or brokers with a view to arranging (bringing about) deals in investments or making arrangements with a view to transactions in investments.

01/08/2004

AUTH App 5.10

Renewals

01/12/2004

AUTH App 5.10.1

It must be emphasised that activities which concern invitations to renew policies and the subsequent effecting of renewal of policies are likely to fall within insurance mediation activity. Those considering the need for authorisation or variation of their permissions will wish to consider whether a process of tacit renewal operates: that is, where a policyholder need take no action if he wishes to maintain his insurance cover by having his policy 'renewed'. This process will typically result in the issue of a new contract of insurance, not an extension of the period of the existing one. It may involve the activities of advising on investments, arranging and dealing in investments as agent. More specifically, preparing a 'tacit renewal' letter on behalf of an insurance undertaking is likely to amount to arranging. Where it contains a recommendation to renew existing cover this is likely to constitute advising on investments (under article 53 of the Regulated Activities Order). If the contract takes effect on the date stipulated in the renewal letter, a contract is concluded with the effect that the letter writer may be dealing in investments as agent. The process may also involve a regulated activity under article 64 (Agreeing to carry on a regulated activity).

01/08/2004

AUTH App 5.11

Other aspects of exclusions

01/12/2004

AUTH App 5.11.1

This part of the guidance deals with:

(1) exclusions which are disapplied where the regulated activity relates to contracts of insurance;

(2) exclusions which are disapplied where a person carries on insurance mediation;

(3) the following exclusions applying to more than one regulated activity:

(a) activities carried on in the course of a profession or non-investment business (article 67 (Activities carried on in the course of a profession or non-investment business));

(b) activities carried on by a provider of relevant goods or services (article 72B (Activities carried on by a provider of relevant goods or services)); and

01/08/2004

AUTH App 5.11.2

There are a number of 'pre-IMD' exclusions that have the effect of restricting the scope of the regulated activities referred to in this guidance. Several of these are disapplied or modified as part of implementation of the IMD.

01/08/2004

Exclusions disapplied where activities relate to contracts of insurance

AUTH App 5.11.3

The exclusions outlined in (1) to (7) have been available to intermediaries (and in some cases insurance undertakings) acting in connection with life policies. In essence, however, from 14 January 2005 the following exclusions do not apply if they concern transactions relating to contracts of insurance:

(1) dealing in investments as agent with or through authorised persons (article 22 of the Regulated Activities Order (Deals with or through authorised persons));

(2) arranging transactions to which the arranger is to be a party, where the arranger enters into or is to enter into the transaction:

(a) as agent for another person; or

(b) as principal, unless the arranger is the only policyholder or will, as a result of the transaction, become the only policyholder (article 28 (Arranging transactions to which the arranger is a party));

(3) arranging deals with or through authorised persons (article 29 (Arranging deals with or through authorised persons));

(4) introducing (article 33 (Introducing));

(5) activities carried on in connection with the sale of goods and supply of services (article 68 (Activities carried on in connection with the sale of goods and supply of services));

(6) groups and joint enterprises (article 69 (Groups and joint enterprises)) (see AUTH App 5.11.6 G); and

(7) activities carried on in connection with the sale of a body corporate (article 70 (Activities carried on in connection with the sale of a body corporate)).

01/08/2004

AUTH App 5.11.4

It follows from the restrictions placed on the exclusions listed in AUTH App 5.11.3 G that, as of 14 January 2005:

(1) unauthorised persons who:

(a) introduce clients or customers to an independent financial adviser with a view to a transaction;

(b) deal as agent on behalf of their clients or customers with or though an authorised person; or

will not be able to rely on articles 29 or 33 to avoid the need for authorisation where the transaction relates to a contract of insurance;

(2) unauthorised persons may, however, be able to rely on the exclusion for the provision of information on an incidental basis in article 72C to continue to avoid the need for authorisation (see AUTH App 5.6.5 G to AUTH App 5.6.9 G (Exclusion: article 72C (Provision of information on an incidental basis)));

(3) authorised persons who themselves introduce clients or customers to others for the purposes of buying or selling any kind of contract of insurance are likely to require a variation of their Part IV permission, as neither article 33 nor generally, article 72C (see AUTH App 5.6.5 G to AUTH App 5.6.9 G (Exclusion: article 72C (Provision of information on an incidental basis))) will apply where this activity amounts to arranging.

01/08/2004

AUTH App 5.11.5

Insurance undertakings are referred to PRU 9.4 (Insurance undertakings and mortgage lenders using insurance or mortgage mediation services) as regards their obligations relating to the use of intermediaries generally.

01/08/2004

AUTH App 5.11.6

(1) The removal of the exclusion for group and joint enterprises in article 69 of the Regulated Activities Order (Groups and joint enterprises) may have implications for a company providing services for:

(a) other members of its group; or

(b) other participants in a joint enterprise of which it is a participant.

(2) Such companies might typically provide risk or treasury management or administration services which may include regulated activities relating to a contract of insurance. If so, such companies will need authorisation or exemption if they conduct the activities by way of business (see AUTH App 5.4 (The business test) generally and (3) and (4)). This is unless another exclusion applies.

(3) In the FSA's view, particular issues arise in applying the by way of business test to group companies. Recital 11 of the Insurance Mediation Directive states that the Directive should apply to persons whose activity consists in providing insurance mediation services to third parties for remuneration. This suggests that the Directive is intended to apply only where the service is provided to a third party. The expression 'third party' is not defined in the Directive. The FSA considers that a group company that is providing services solely for the benefit of other group companies would not normally be regarded as providing services to a third party. The FSA also considers that, as a result, a group company providing services solely for the benefit of other group companies should not normally be regarded as satisfying the requirement that it be remunerated for providing insurance mediation services to third parties. Were a group company to be remunerated other than by another group company, however, the situation may be different. For example, if the group company receives commission from an insurer or broker, that fact would tend to suggest that the company has been rewarded for providing a service to the insurer or broker. In the FSA's view, it is appropriate to apply this principle to a group as defined in section 421 (Group) of the Act.

(4) The FSA considers that similar principles to those applied to a group company in (2) may be applied to the participants in a joint enterprise. This would be where one participant in the joint enterprise is providing services solely for the benefit of another participant and for the purposes of the joint enterprise. This extends to any person in the same group as a participant in a joint enterprise and who provides insurance mediation services to one or more participants for the purposes of or in connection with the joint enterprise.

01/08/2004

Exclusions disapplied in connection with insurance mediation

AUTH App 5.11.7

Article 4(4A) of the Regulated Activities Order (Specified activities: general) disapplies certain exclusions where a person, for remuneration, takes up or pursues insurance mediation (as defined in article 2.3 of the IMD (see AUTH App 5.2.5 G (Approach to implementation of the IMD) and AUTH App 5.16.2 G (Article 2.3 of the Insurance Mediation Directive)) in relation to a risk or commitment located in an EEA state. The relevant exclusions which are disapplied are:

(1) arrangements in connection with lending on the security of insurance policies (article 30 of the Regulated Activities Order (Arranging transactions in connection with lending on the security of insurance policies));

(2) activities carried on by trustees, nominees and personal representatives (article 66 (Trustees, nominees and personal representatives)); and

(3) activities carried on in the course of a profession or non-investment business (article 67 (Activities carried on in the course of a profession or non-investment business)) (This exclusion is considered in further detail in AUTH App 5.11.9 G to AUTH App 5.11.12 G (Activities carried on in the course of a profession or non-investment business)).

01/08/2004

Exclusions applying to more than one regulated activity

AUTH App 5.11.8

Chapter XVII of the Regulated Activities Order (Exclusions applying to several specified kinds of activity) contains various exclusions applying to several kinds of activity. Three exclusions of relevance in relation to contracts of insurance are dealt with in this section and a fourth, overseas persons, in AUTH App 5.12 (Link between activities and the United Kingdom).

01/08/2004

Activities carried on in the course of a profession or non-investment business

AUTH App 5.11.9

Article 67 excludes from the activities of dealing as agent, arranging (bringing about) deals in investments, making arrangements with a view to transactions in investments assisting in the administration and performance of a contract of insurance and advising on investments, any activity which:

(1) is carried on in the course of carrying on any profession or business which does not otherwise consist of the carrying on of regulated activities in the United Kingdom; and

(2) may reasonably be regarded as a necessary part of other services provided in the course of that profession or business.

In the FSA's view, the fact that a person may carry on regulated activities in the course of the carrying on of a profession or business does not, of itself, mean that the profession or business consists of regulated activities. This is provided that the main focus of the profession or business does not involve regulated activities and that the regulated activities that are carried on arise in a way that is incidental and complementary to the carrying on of the profession or business.

01/08/2004

AUTH App 5.11.10

Although the article 67 exclusion is disapplied (by article 4(4A) of the Regulated Activities Order (Specified investments: general)) when a person takes up or pursues insurance mediation or reinsurance mediation as defined by articles 2.3 and 2.5 of the IMD, there may be cases where a person is not carrying on activities that amount to insurance mediation. For example, where a person's activities amount simply to the provision of information on an incidental basis in the context of another professional activity, these may fall outside the scope of article 2.3 IMD (see AUTH App 5.16.2 G (Article 2.3 of the Insurance Mediation Directive)) and the exclusion in article 67 may then operate to exclude these activities. Also, it is possible that a professional person's activities may not amount to a regulated activity at all. For example, a doctor who provides a medical report to an insurer may be regarded as making arrangements with a view to providing an expert medical opinion rather than with a view to transactions in contracts of insurance. In such cases, article 67 will not be needed.

01/08/2004

AUTH App 5.11.11

Article 67 may also apply to activities relating to assignments of insurance policies, as, in the FSA's view, article 2.3 of the IMD applies essentially to the creation of new contracts of insurance and not the assignment of rights under existing policies. As such, where a solicitor or licensed conveyancer arranges an assignment of a contract of insurance, the exclusion in article 67 remains of potential application. For similar reasons, trustees advising on or arranging assignments of contracts of insurance may, in certain circumstances, be able to rely on the exclusions in article 66 of the Regulated Activities Order.

01/08/2004

AUTH App 5.11.12

For article 67 to apply in these cases, in addition to AUTH App 5.11.9 G(1) and (2), the activity in question must not be remunerated separately from other services (article 67(2) of the Regulated Activities Order).

01/08/2004

Activities carried on by a provider of relevant goods or services

AUTH App 5.11.13

Article 72B (see also AUTH App 5.3.7 G (Connected contracts of insurance)) may be of relevance to persons who supply non-motor goods or provide services related to travel in the course of carrying on a profession or business which does not otherwise consist of carrying on regulated activities. In the FSA's view, the fact that a person may carry on regulated activities in the course of the carrying on of a profession or business does not, of itself, mean that the profession or business consists of regulated activities. This is provided that the main focus of the profession or business does not involve regulated activities and that the regulated activities that are carried on arise in a way that is incidental and complementary to the carrying on of the profession or business. For example, a travel agent might carry on insurance mediation activities in relation to some contracts of insurance that satisfy the conditions of the article 72B and some that do not. The former contracts will be excluded from regulation even though the travel agent must seek authorisation or become an appointed representative to be permitted to sell the latter contracts. The exclusion applies to insurance mediation activities when carried on in relation to 'connected contracts of insurance'. In broad terms, a 'connected contract of insurance' is a contract of insurance which:

(1) is not a contract of long-term insurance (as defined by article 3 of the Regulated Activities Order (Interpretation));

(2) has a total duration (including rights to renewal) of five years or less;

(3) has an annual premium (or the equivalent of annual premium) of £500 or less;

(4) covers the risk of:

(a) breakdown, loss of, or damage to, non-motor goods supplied by the provider; or

(b) damage to, or loss of, baggage and other risks linked to travel booked with the provider ('travel risks');

(5) does not cover any liability risks (except, in the case of a contract which covers travel risks, where the cover is ancillary to the main cover provided by the contract);

(6) is complementary to the non-motor goods being supplied or service being provided by the provider; and

(7) is of such a nature that the only information that a person requires in order to carry on one of the insurance mediation activities is the cover provided by the contract.

01/08/2004

AUTH App 5.11.14

In the FSA's view, the liability risks referred to in AUTH App 5.11.13 G(5) cover risks in relation to liabilities that the policyholder might have to others (that is, third party claims). Many policies will provide this sort of cover and so fall outside the scope of the exclusion. For example, a policy that covers the cost of unauthorised calls made when a mobile telephone is stolen includes 'liability risks' and would not be a 'connected contract of insurance'. By contrast, travel policies which provide cover in respect of the policyholder's personal liability while travelling may fall within the exclusion by virtue of AUTH App 5.11.13 G(5), where sold as part of a package by travel agents and other providers of services related to travel.

01/08/2004

AUTH App 5.11.15

In the FSA's view, the condition in AUTH App 5.11.13 G(7) is likely to be satisfied where the insurance mediation activities relate to a standard form contract of insurance, the terms of which (other than the cost of the premium) are not subject to negotiation.

01/08/2004

Large risks

AUTH App 5.11.16

Article 72D (Large risks contracts where risk situated outside the EEA) provides an exclusion for large risks situated outside the EEA. Broadly speaking, these are risks relating to:

(1) railway rolling stock, aircraft, ships, goods in transit, aircraft liability and shipping liability;

(2) credit and suretyship where relating to the policyholder's commercial or professional liability;

(3) land vehicles, fire and natural forces, property damage, motor vehicle liability where the policyholder is a business of a certain size.

For a fuller definition of contracts of large risks see the definition in the Glossary.

01/08/2004

AUTH App 5.12

Link between activities and the United Kingdom

01/12/2004

Introduction

AUTH App 5.12.1

Section 19 of the Act (The general prohibition) provides that the requirement to be authorised under the Act only applies in relation to regulated activities which are carried on 'in the United Kingdom'. In many cases, it will be quite straightforward to identify where an activity is carried on. But, when there is a cross-border element, for example because a customer is outside the United Kingdom or because some other element of the activity happens outside the United Kingdom, the question may need careful consideration. AUTH App 5.15.8 G (Flow chart: am I carrying on regulated activities in the United Kingdom?) has a flow chart setting out the questions a person needs to consider in determining whether or not his regulated activities are carried on 'in the United Kingdom '.

01/08/2004

AUTH App 5.12.2

01/08/2004

AUTH App 5.12.3

The table in AUTH App 5.12.4 G is a very simplified summary of territorial issues relating to overseas insurance intermediaries carrying on the business of insurance mediation activities in or into the United Kingdom for remuneration.

01/08/2004

AUTH App 5.12.4

Territorial issues relating to overseas insurance intermediaries carrying on insurance mediation activities in or into the United Kingdom

Needs Part IV permission

Schedule 3 EEA passport rights available

Overseas persons exclusion available

Registered EEA-based intermediary with UK branch (registered office or head office in another EEA State)

Yes

Registered EEA-based intermediary with no UK branch providing cross-border services

Yes

Potentially available [see Note 1]

Third country intermediary operating from branch in UK

Yes

Third country intermediary providing services in (or into) UK

Yes unless overseas persons exclusion applies

Potentially available

Note 1. This does not, however, affect the firm's authorisation under Schedule 3 to the Act (see AUTH App 5.12.13 G to AUTH App 5.12.14 G (Passporting)).

01/08/2004

Where are insurance mediation activities carried on?

AUTH App 5.12.5

Persons carrying on insurance mediation activities from a registered office or head office in the United Kingdom will clearly be carrying on regulated activities in the United Kingdom. However, a person may be considered to be carrying on regulated activities in the United Kingdom even where not carrying on the activity from a registered office or head office in the United Kingdom. This is explained further in AUTH App 5.12.5 G to AUTH App 5.12.7 G.

01/08/2004

AUTH App 5.12.6

In determining the location of an activity, and hence whether it is carried on in the United Kingdom, various factors need to be taken into account in turn, notably:

(1) section 418 of the Act (Carrying on regulated activities in the United Kingdom);

(2) the nature of the activity; and

(3) the overseas persons exclusion (see AUTH App 5.12.9 G to AUTH App 5.12.10 G (Overseas persons)).

01/08/2004

AUTH App 5.12.7

Section 418 of the Act extends the meaning that 'carry on regulated activity in the United Kingdom' would normally have by setting out additional cases in which a person who would not otherwise be regarded as carrying on the activity in the United Kingdom is to be regarded as doing so. Each of the following cases thus amounts to carrying on a regulated activity in the United Kingdom:

(1) where a UK based person carries on a regulated activity in another EEA State in the exercise of rights under a Single Market Directive;

(2) where a UK-based person carries on a regulated activity and the day-to-day management of the activity is the responsibility of an establishment in the United Kingdom;

(3) where a regulated activity is carried on by a person who is not based in the United Kingdom but is carried on from an establishment maintained by him in the United Kingdom;

(4) where an electronic commerce activity is carried on with or for a person in an EEA State from an establishment in the United Kingdom.

In each of these cases it is irrelevant where the person with whom the activity is carried on is situated.

01/08/2004

AUTH App 5.12.8

Otherwise, where the cases in AUTH App 5.12.7 G (1) to (4) do not apply, it is necessary to consider further the nature of the activity in order to determine where insurance mediation is carried on. Persons that arrange contracts of insurance will usually be considered as carrying on the activity of arranging in the location where these activities take place. As for dealing activities, the location of the activities will depend on factors such as where the acceptance takes place, which in turn will depend on the method of communication used. In the case of advising, this is generally considered to take place where the advice is received.

01/08/2004

Overseas persons

AUTH App 5.12.9

Article 72 of the Regulated Activities Order (Overseas persons) provides a potential exclusion for persons with no permanent place of business in the United Kingdom from which regulated activities are conducted or offers to conduct regulated activities are made. Where these persons carry on insurance mediation activities in the United Kingdom, they may be able to take advantage of the exclusions in article 72 of the Regulated Activities Order. In general terms, these apply where the overseas person either:

(1) deals or arranges deals with or through authorised or exempt persons only; or

(2) enters into deals with (or on behalf of) a person in the United Kingdom or gives advice on investments in the United Kingdom, in each case as a result of a 'legitimate approach'.

A 'legitimate approach', for the purposes of (2), is one that results from an unsolicited approach by a person (for example, a customer) or otherwise is a result of an approach by, or on behalf of, an overseas person which complies with the restriction on financial promotion under section 21 of the Act (see AUTH App 1.3.1 G (Financial promotion)).

01/08/2004

AUTH App 5.12.10

The overseas person exclusion is available to persons who do not have a permanent place of business in the United Kingdom and so is of relevance to third country intermediaries (that is, non EEA-based intermediaries) who carry on insurance mediation activities in, or into, the United Kingdom (for example with or through authorised insurance brokers and insurance undertakings operating in the Lloyd's market).

01/08/2004

How should persons be authorised?

AUTH App 5.12.11

UK-based persons must obtain Part IV permission in relation to their insurance mediation activities in the United Kingdom as one of the following:

(1) a body corporate whose registered office is situated in the United Kingdom;

(2) a partnership or unincorporated association whose head office is situated in the United Kingdom;

(3) an individual (that is, a sole trader) whose residence is situated in the United Kingdom.

The United Kingdom will, in each case, be the Home State for the purposes of the IMD for insurance or reinsurance intermediaries (see further in connection with the E-Commerce Directive in AUTH App 5.12.15 G to AUTH App 5.12.17 G (E-Commerce Directive)).

01/08/2004

AUTH App 5.12.12

Non-UK-based persons wishing to carry on insurance mediation activities in the United Kingdom must:

(1) qualify for authorisation by exercising passport rights (see section 31 (Authorised persons) and schedule 3 (EEA passport rights) to the Act and AUTH App 5.12.13 G to AUTH App 5.12.14 G (Passporting)); or

(2) make use of the overseas persons exclusion (which then has the effect that activities are deemed not to be regulated activities carried on in the United Kingdom); or

(3) seek Part IV permission.

01/08/2004

Passporting

AUTH App 5.12.13

The effect of the IMD is that any EEA-based insurance intermediaries must first be registered in their home EEA State before carrying on insurance mediation in that EEA State or other EEA States. For these purposes, an EEA-based insurance intermediary is either:

(1) a legal person with its registered office or head office in an EEA State other than the United Kingdom; or

(2) a natural person resident in an EEA State other than the United Kingdom.

Registered EEA-based insurance intermediaries wishing to establish branches in the United Kingdom or provide services on a cross-border basis into the United Kingdom can do so by notifying their Home State regulator which in turn notifies the FSA. This enables the intermediary to acquire passporting rights under Schedule 3 to the Act (EEA passporting rights) (see Schedule 3(13) and (14) of the Act as amended by the Insurance Mediation Directive (Miscellaneous Amendments) Regulations 2003). AUTH 5 (Qualifying for authorisation under the Act) has general guidance on the exercise of passporting rights by EEA firms.

01/08/2004

AUTH App 5.12.14

On the other hand, non-EEA-based insurance intermediaries wishing to establish a branch in the UK for the purpose of carrying on insurance mediation activities may only do so with Part IV permission.

01/08/2004

E-Commerce Directive

AUTH App 5.12.15

The E-Commerce Directive removes restrictions on the cross-border provision of services by electronic means, introducing a country of origin approach to regulation. This requires EEA States to impose certain requirements on the outward provision of such services and to lift them from inward providers. The E-Commerce Directive defines an e-commerce service (termed an information society service) as any service, normally provided for remuneration, at a distance, by electronic means, and at the individual request of the recipient of the service. So, for example, it includes services provided over the internet, by solicited e-mail, and interactive digital television. Further guidance is contained in ECO.

01/08/2004

AUTH App 5.12.16

The E-Commerce Directive does not remove the IMD requirement for persons taking up or pursuing insurance mediation for remuneration to be registered in their Home State. Nor does it remove the requirement for EEA-based intermediaries to acquire passporting rights in order to establish branches in the United Kingdom (see AUTH App 5.12.7 G (Where is insurance mediation carried on?) in relation to electronic commerce activity carried on from an establishment in the United Kingdom) or provide services on a cross-border basis into the United Kingdom where the relevant activity is carried on in the United Kingdom. An example of electronic commerce activity provided on a cross-border basis into the United Kingdom could be a recommendation in a (solicited) e-mail from an EEA-based intermediary to a UK-based customer to buy a particular contract of insurance.

01/08/2004

AUTH App 5.12.17

Put shortly, the E-Commerce Directive relates to services provided into the United Kingdom from other EEA States and from the United Kingdom into other Member States. In broad terms, such cross-border insurance mediation services provided by an EEA firm into the United Kingdom (via electronic commerce activity or distance means) will generally be subject to IMD registration in, and conduct of business regulation of, the intermediary's EEA State of origin. By contrast, insurance mediation services provided in the United Kingdom will be subject to UK conduct of business regulation, although the requirement for registration will again depend upon the intermediary's EEA State of origin.

01/08/2004

AUTH App 5.13

Appointed representatives

01/12/2004

What is an appointed representative?

AUTH App 5.13.1

Section 39 of the Act (Exemption of appointed representatives) exempts appointed representatives from the need to obtain authorisation. An appointed representative is a person who is party to a contract with an authorised person which permits or requires him to carry on certain regulated activities (see Glossary for full definition). SUP 12 (Appointed representatives) contains rules and guidance relating to appointed representatives.

01/08/2004

AUTH App 5.13.2

A person who is an authorised person cannot be an appointed representative (see section 39(1) of the Act (Exemption of appointed representatives)).

01/08/2004

Business for which an appointed representative is exempt

AUTH App 5.13.3

An appointed representative can carry on only those regulated activities which are specified in the Appointed Representatives Regulations. With effect from 14 January 2005, the regulated activities set out in the table in AUTH App 5.13.4 G will be included in those regulations. As set out in the table, the insurance mediation activities that can be carried on by an appointed representative differ depending on the type of contracts of insurance in relation to which the activities are carried on.

01/08/2004

AUTH App 5.13.4

Insurance mediation activities able to be carried on by an appointed representative. This table belongs to AUTH App 5.13.3 G

Type of contract of insurance

Regulated activities an appointed representative can carry on

General insurance contract

•Dealing in investments as agent;
•Arranging;
•Assisting in the administration and performance of a contract of insurance;
•Advising on investments; and
• Agreeing to carry on these regulated activities.

Pure protection contract

•Dealing in investments as agent (but only where the contract is not a long-term care insurance contract);
•Arranging;
•Assisting in the administration and performance of a contract of insurance;
•Advising on investments; and
• Agreeing to carry on these regulated activities.

Life policy (note that this already has effect prior to 14 January 2005)

•Arranging;
•Assisting in the administration and performance of a contract of insurance;
•Advising on investments; and
• Agreeing to carry on these regulated activities

01/08/2004

Persons who are not already appointed representatives

AUTH App 5.13.5

A person who is not already an appointed representative may wish to become one in relation to the regulated activities specified in the Appointed Representatives Regulations (see table in AUTH App 5.13.4 G). If so, he must be appointed under a written contract by an authorised person, who has permission to carry on those regulated activities and who accepts responsibility for the appointed representative's actions when acting for him. SUP 12.4 (What must a firm do when it appoints an appointed representative?) and SUP 12.5 (Contracts: required terms) set out the detailed requirements that must be met for an appointment to be made. In particular, an appointed representative will not be able to commence an insurance mediation activity until he is included on the FSA Register for such activities.

01/08/2004

Persons who are already appointed representatives

AUTH App 5.13.6

Where a person is already an appointed representative and he proposes to carry on, with effect from 14 January 2005, any insurance mediation activities, he will need to consider the following matters.

(1) He must become authorised if his proposed insurance mediation activities include activities that do not fall within the table in AUTH App 5.13.4 G (for example, dealing as agent in pure protection contracts) and he wishes to carry on these activities. The Act does not permit any person to be exempt for some activities and authorised for others. He will, therefore, need to apply for permission to cover all the regulated activities that he proposes to carry on from 14 January 2005.

(2) If he proposes to carry on other regulated activities specified in the Appointed Representatives Regulations in relation to contracts of insurance (see the table in AUTH App 5.13.4 G), he may be able to do so as an appointed representative bearing in mind the following.

(a) He will need to be appointed by an authorised person prepared to accept responsibility for his insurance mediation activities when acting for him. The authorised person must have permission to carry on these regulated activities.

(b) If these insurance mediation activities are to be carried on for the same authorised person who has already appointed him for his other regulated activities, the contract between them will need to be amended to reflect the additional activities. Other amendments to the contract will be required (see SUP 12.5.6A R).

(c) The effect of amendments to the Appointed Representatives Regulations is that an appointed representative cannot commence an insurance mediation activity until he is included on the FSA Register as carrying on such activities.

(d) An appointed representative would be entitled to have more than one principal subject to certain restrictions. In relation to non-investment insurance contracts (general insurance contracts and pure protection contracts), an appointed representative may have an unlimited number of principals. In relation to regulated mortgage contracts and designated investment business, an appointed representative is limited in the number of principals he may have. In any case where an appointed representative has multiple principals, those principals are required to enter into a multiple- principal agreement (see SUP 12.4.5D G to SUP 12.4.5G G (Appointment of an appointed representative (other than an introducer appointed representative)).

(e) If the activities of the appointed representative are limited to introducing, he should consider the specific Handbook provisions relating to introducer appointed representatives (see SUP 12 (What must a firm do when it appoints an appointed representative?)).

01/08/2004

AUTH App 5.14

Exemptions

01/12/2004

Professionals

AUTH App 5.14.1

Professional firms (broadly firms of solicitors, accountants and actuaries) may carry on insurance mediation activities in the course of their professional activities. Exempt professional firms carrying on insurance mediation activities may continue to be able to use the Part XX exemption to avoid any need for authorisation. PROF 2 (Status of exempt professional firm) contains guidance on the Part XX exemption. They will, however, need to be shown on the FSA Register as carrying on insurance mediation activities, in order to benefit from this exemption. The task of registration is the responsibility of the designated professional bodies who will need to inform the FSA both of member firms carrying on insurance mediation activities and individuals within firms' management responsible for these activities.

01/08/2004

AUTH App 5.14.2

Professional firms with practices that involve acting for claimants in litigation against insurance undertakings are likely to be carrying on the regulated activity of assisting in the administration and performance of a contract of insurance. Exempt professional firms whose practices contain a material element of such activity should consider whether they can continue to take advantage of the Part XX exemption to avoid any need for authorisation, having regard to the relevant provisions of the Act, in particular section 327 (Exemption from the general prohibition) and the guidance in PROF 2.1.14 G (Exempt regulated activities).

01/08/2004

AUTH App 5.14.3

Professional firms should be aware of the disapplication of the exclusions for trustees (article 66) and activities carried on in the course of a profession or non-investment business (article 67) outlined in AUTH App 5.11.7 G (Exclusions disapplied in connection with insurance mediation) where their activities would amount to insurance mediation. Where they do not, they will still be able to rely upon article 67. Otherwise, the Nonexempt Activities Order imposes limitations on the extent to which professional firms can give advice to individuals. In particular, a professional firm cannot recommend to a private client that he buy a life policy, unless he is endorsing a corresponding recommendation given to the client. The recommendation he endorses must be one given by an authorised person permitted to advise on life policies, or an exempt person for these purposes. No such restrictions apply, however, in relation to contracts of insurance other than life policies.

01/08/2004

AUTH App 5.14.4

Professional firms relying (prior to 14 January 2005) on the exclusions in articles 29 (Arranging deals with or through authorised persons) and 33 (Introducing) when introducing clients to authorised persons in connection with the purchase of life policies are directed to AUTH App 5.11.3 G (Exclusions disapplied where activities relate to contracts of insurance). More generally, as indicated in AUTH App 5.6.8 G, the article 72C exclusion (Provision of information on an incidental basis) is potentially available to unauthorised professional firms including exempt professional firms. This may be relevant to professional firms arranging contracts of insurance for clients on an individual basis.

01/08/2004

Other exemptions

AUTH App 5.14.5

In addition to certain named persons exempted by the Exemption Order from the need to obtain authorisation, the following bodies are exempt in relation to insurance mediation activities that do not relate to life policies:

(1) local authorities but not their subsidiaries;

(2) registered social landlords in England and Wales within the meaning of Part I of the Housing Act 1996 but not their subsidiaries;

(3) registered social landlords in Scotland within the meaning of the Housing (Scotland) Act 2001 but not their subsidiaries;

(4) the Housing Corporation;

(5) Scottish Homes;

(6) The Northern Ireland Housing Executive.

01/08/2004

AUTH App 5.15

Illustrative tables

01/12/2004

AUTH App 5.15.1

This flow chart sets out the matters a person will need to consider to see if he will need authorisation for carrying on insurance mediation activities. It is referred to in AUTH App 5.2.3 G (Questions to be considered to decide if authorisation is required).

01/08/2004

AUTH App 5.15.2

Flow chart: regulated activities related to insurance mediation activities - do you need authorisation?

01/08/2004

AUTH App 5.15.3

The table in AUTH App 5.15.4 G is designed as a short, user-friendly guide but should be read in conjunction with the relevant sections of the text of this guidance. It is not a substitute for consulting the text of this guidance or seeking professional advice as appropriate (see AUTH App 5.1.4 G to AUTH App 5.1.6 G on the effect of this guidance). References in this Annex to articles are to articles of the Regulated Activities Order In this table, it is assumed that each of the activities described is carried on by way of business (see AUTH App 5.4). Save where otherwise indicated, it is assumed that the intermediary is carrying on activities in respect of policies where he is not the policyholder. Note also that this table does not provide an exhaustive list of all of the exclusions or exemptions that are of relevance to each type of activity. For a full explanation of the exclusions and exemptions under the Regulated Activities Order and their applicability see generally AUTH App 5.3.7 G to AUTH App 5.3.8 G, AUTH App 5.6.5 G to AUTH App 5.6.23 G, AUTH App 5.7.7 G, AUTH App 5.8.24 G to AUTH App 5.8.26 G, AUTH App 5.11, AUTH App 5.12.9 G to AUTH App 5.12.10 G, AUTH App 5.13 and AUTH App 5.14. This Table is referred to in AUTH App 5.7.5 G (The regulated activities: assisting in the administration and performance of a contract of insurance).

01/08/2004

AUTH App 5.15.4

Types of activity -are they regulated activities and, if so, why?

Type of activity

Is it a regulated activity?

Rationale

MARKETING AND EFFECTING INTRODUCTIONS

Passive display of information-for example, medical insurance brochures in doctor's surgery (whether or not remuneration is received for this activity)

No.

Merely displaying information does not constitute making arrangements under article 25(2) (see AUTH App 5.6.4 G).

Recommending a broker/insurance undertaking and providing customer with contact details (whether by phone, fax, e-mail, face-to-face or any other means of communication)

Yes, but article 72C may be available.

This will constitute making arrangements under article 25(2). But, the exclusion in article 72C will apply if all the intermediary does is supply information to the customer and the conditions of article 72C are otherwise met (see AUTH App 5.6.5 G to AUTH App 5.6.9 G). Generally, this will not amount to advice under article 53 unless there is an implied recommendation of a particular policy (see AUTH App 5.8.4 G), in which case article 72C would not be available.

Providing an insurance undertaking/broker with contact details of customer

Yes.

This will constitute making arrangements under article 25(2) when undertaken in the context of regular or ongoing arrangements for introducing customers. Article 72C will not apply because the information is supplied to someone other than the policyholder or potential policyholder.

Marketing on behalf of insurance undertaking to intermediaries only (for example, broker consultants)

Yes.

This amounts to work preparatory to the conclusion of contracts of insurance and so constitutes making arrangements under article 25(2). Article 72C is not available because this activity does not involve provision of information to the policyholder or potential policyholder only.

Telemarketing services (that is, companies specialising in marketing an insurance undertaking's products/services to prospective customers)

Yes.

This amounts to introducing and/or other work preparatory to the conclusion of contracts of insurance and so constitutes making arrangements under article 25(2). This could also involve article 25(1) arranging where the telemarketing company actually sells a particular policy and could involve advising on investments. Article 72C will not be available where the provision of information is more than incidental to the telemarketing company's main business or where the telemarketing company is advising on investments.

PRE-PURCHASE DISCUSSIONS WITH CUSTOMERS AND ADVICE

Discussion with client about need for insurance generally/need to take out a particular type of insurance

Generally, no. Article 72C available if needed.

Not enough, of itself, to constitute making arrangements under article 25(2), but you should consider whether, viewed as a whole, your activities might amount to arranging. If so, article 72C might be of application (see AUTH App 5.6.5 G to AUTH App 5.6.9 G).

Advising on the level of cover needed

Generally, no. Article 72C available if needed.

Not enough, of itself, to constitute making arrangements under article 25(2), but you should consider whether, viewed as a whole, your activities might amount to making arrangements under article 25(2) (see AUTH App 5.8.3 G). If so, article 72C might be of application (see AUTH App 5.6.5 G to AUTH App 5.6.9 G).

Pre-purchase questioning in the context of filtered sales (intermediary asks a series of questions and then suggests several policies which suit the answers given)

Yes. Subject to Article 72 C exclusion where available.

This will constitute arranging although article 72C may be of application (see AUTH App 5.6.5 G to AUTH App 5.6.9 G). If there is no express or implied recommendation of a particular policy, this activity will not amount to advice under article 53 (see AUTH App 5.8.15 G to AUTH App 5.8.19 G).

Explanation of the terms of a particular policy or comparison of the terms of different policies

Possibly. Article 72C available.

This is likely to amount to making arrangements under article 25(2). In certain circumstances, it could involve advising on investments (see AUTH App 5.8.8 G (Advice or information)). Where the explanation is provided to the potential policyholder, and does not involve advising on investments, article 72C may be of application (see AUTH App 5.6.5 G to AUTH App 5.6.9 G), and where information is provided by a professional in the course of a profession, article 67 may apply (see AUTH App 5.11.9 G to AUTH App 5.11.12 G).

Advising that a customer take out a particular policy

Yes.

This amounts to advice on the merits of a particular policy under article 53 (see AUTH App 5.8.4 G to AUTH App 5.8.5 G).

Advising that a customer does not take out a particular policy

Yes.

This amounts to advice on the merits of a particular policy under article 53 (see AUTH App 5.8.4 G to AUTH App 5.8.5 G).

Advice by journalists in newspapers, broadcasts etc.

Generally, no because of the article 54 exclusion.

Article 54 provides an exclusion for advice given in newspapers etc (see AUTH App 5.8.24 G to AUTH App 5.8.25 G).

Giving advice to a customer in relation to his buying a consumer product, where insurance is a compulsory secondary purchase and/or a benefit that comes with buying the product

Not necessarily but depends on the circumstances

Where the advice relates specifically to the merits of the consumer product, it is possible that references to the accompanying insurance may be seen to be information and not advice. If, however, the advice relates, in part, to the merits of the insurance element, then it will be regulated activity.

ASSISTING CUSTOMERS WITH COMPLETING/SENDING APPLICATION FORMS

Providing information to customer who fills in application form

Possibly. Subject to article 67 or 72C exclusions where available.

This activity may amount to arranging although the exclusions in article 67 (see AUTH App 5.11.9 G to AUTH App 5.11.12 G) and article 72C (see AUTH App 5.6.5 G to AUTH App 5.6.9 G) may be of application.

Helping a potential policyholder fill in an application form

Yes.

This activity amounts to arranging. Article 72C will not apply because this activity goes beyond the mere provision of information to a policyholder or potential policyholder (see AUTH App 5.6.5 G to AUTH App 5.6.9 G).

Receiving completed proposal forms for checking and forwarding to an insurance undertaking (for example, an administration outsourcing service provider that receives and processes proposal forms)

Yes.

This amounts to arranging. Article 72C does not apply because this activity goes beyond the mere provision of information to a policyholder or potential policyholder (see AUTH App 5.6.5 G to AUTH App 5.6.9 G).

Assisting in completion of proposal form and sending to insurance undertaking

Yes.

This activity amounts to arranging. Article 72C does not apply because this activity goes beyond the mere provision of information (see AUTH App 5.6.5 G to AUTH App 5.6.9 G).

NEGOTIATING AND CONCLUDING CONTRACTS OF INSURANCE

Negotiating terms of policy on behalf of customer with the insurance undertaking

Yes.

This activity amounts to arranging (see AUTH App 5.6.2 G).

Negotiating terms of policy on behalf of insurance undertaking with the customer and signing proposal form on his behalf

Yes.

These activities amount to both arranging and dealing in investments as agent.

Concluding a contract of insurance on insurance company's behalf, for example, motor dealer who has authority to conclude insurance contract on behalf of insurance undertaking when selling a car

Yes.

A person carrying on this activity will be dealing in investments as agent. He will also be arranging (as the article 28 exclusion only applies in the limited circumstances envisaged under article 28(3)) (see AUTH App 5.6.12 G).

Agreeing, on behalf of a prospective policy holder, to buy a policy.

Yes.

A person who, with authority, enters into a contract of insurance on behalf of another is dealing in investments as agent under article 21, and will also be arranging.

Providing compulsory insurance as a secondary purchase

Yes. It will amount to dealing in investments as agent or arranging.

The fact that the insurance is secondary to the primary product does not alter the fact that arranging the package involves arranging the insurance.

COLLECTION OF PREMIUMS

Collection of cheque for premium from the customer at the pre-contract stage.

Yes (as part of arranging).

This activity is likely to form part of arranging. But the mere collection/receipt of premiums from the customer is unlikely, without more, to amount to arranging.

Collection of premiums at post-contract stage

No.

The mere collection of premiums from policyholders is unlikely, without more, to amount to assisting in the administration and performance of a contract of insurance.

MID-TERM ADJUSTMENTS AND ASSIGNMENTS

Solicitors or licensed conveyancers discharging client instructions to assign contracts of insurance.

Not where article 67 applies.

As the assignment of rights under a contract of insurance (as opposed to the creation of new contracts of insurance) does not fall within the IMD, article 67 is of potential application (see AUTH App 5.11.9 G to AUTH App 5.11.12 G).

Making mid-term adjustments to a policy, for example, property manager notifies changes to the names of the leaseholders registered as "interested parties" in the policy in respect of the property.

Yes.

Assuming the freeholder (as policyholder) is obliged under the terms of the policy to notify the insurance undertaking of changes to the identity of the leaseholders, the property manager is likely to be assisting in the administration and the performance of the contract of insurance.

TRADED ENDOWMENT POLICIES ("TEPs")

Making introductions for the purposes of selling TEPs

Yes, unless article 72C applies.

Making introductions for these purposes is arranging unless article 72C applies (see AUTH App 5.6.5 G to AUTH App 5.6.9 G). The exclusions in article 29 (Arranging deals with or through authorised persons) and 33 (Introducing) no longer apply to arranging contracts of insurance.

Market makers in TEPs

Yes, although the exclusion in article 28 may apply.

Unauthorised market makers can continue to make use of the exclusions in articles 15 (Absence of holding out etc.) and 16 (Dealing in contractually based investments), where appropriate. In order to avoid the need for authorisation in respect of arranging they may be able to rely upon article 28 (see AUTH App 5.6.12 G).

ASSISTING POLICYHOLDER WITH MAKING A CLAIM

Merely providing information to the insured to help him complete a claim form

No.

Of itself, this is likely to amount to assisting in the administration but not the performance of a contract of insurance. In the FSA's view, the provision of information in these circumstances is more akin to facilitating performance of a contract of insurance rather than assisting in the performance (see AUTH App 5.7.3 G to AUTH App 5.7.5 G)

Completion of claim form on behalf of insured

Potentially.

This activity amounts to assisting in the administration of a contract of insurance. Whether this activity amounts to assisting in the administration and performance of a contract of insurance will depend upon whether a person's assistance in filling in a claims form is material to whether performance of the contractual obligation to notify a claim takes place (see AUTH App 5.7.2 G to AUTH App 5.7.3 G).

Notification of claim to insurance undertaking and helping negotiate its settlement on the policyholder's behalf

Yes.

This activity amounts to assisting in the administration and performance of a contract of insurance (see AUTH App 5.7.4 G).

ASSISTING INSURANCE UNDERTAKING WITH CLAIMS BY POLICYHOLDERS

Negotiation of settlement of claims on behalf of an insurance undertaking

No.

Claims management on behalf of an insurance undertaking does not amount to assisting in the administration and performance of a contract of insurance by virtue of the exclusion in article 39B (see AUTH App 5.7.7 G).

Providing information to an insurance undertaking in connection with its investigation or assessment of a claim

No.

This activity does not amount to assisting in the administration and performance of a contract of insurance.

Loss adjusters and claims management services (for example, by administration outsourcing providers)

Potentially.

These activities may amount to assisting in the administration and performance of a contract of insurance. Article 39B excludes these activities, however, when undertaken on behalf of an insurance undertaking only (see AUTH App 5.7.7 G).

Providing an expert appraisal of a claim

No.

This activity does not amount to assisting in the administration and performance of a contract of insurance whether carried out on behalf of an insurance undertaking or otherwise.

Jeweller repairs customer's jewellery pursuant to a policy which permits the jeweller to carry out repairs

No.

This activity does not amount to assisting in the administration and performance of a contract of insurance. It amounts to managing claims on behalf of an insurance undertaking and so falls within the exclusion in article 39B (see AUTH App 5.7.7 G).

01/08/2004

AUTH App 5.15.5

The flow chart in AUTH App 5.15.6 G sets out the matters a person whose introducing activities potentially amount to making arrangements with a view to transactions in investments will need to consider to see if he can use the exclusion in article 72C (Provision of information on an incidental basis). It is referred to in AUTH App 5.1.6 G (Purpose of guidance) and AUTH App 5.6.9 G (Exclusion: article 72C (Provision of information on an incidental basis)).

01/08/2004

AUTH App 5.15.6

Flow Chart: Introducers.

01/08/2004

AUTH App 5.15.7

The flow chart in AUTH App 5.15.8 G sets out the questions a person needs to consider in determining whether or not his regulated activities are carried on 'in the United Kingdom'.

01/08/2004

AUTH App 5.15.8

Flow chart: am I carrying on regulated activities in the United Kingdom?

01/08/2004

AUTH App 5.16

Meaning of insurance mediation

01/12/2004

AUTH App 5.16.1

AUTH App 5.16.2 G sets out the text of article 2.3 of the Insurance Mediation Directive. It is referred to in AUTH App 5.2.5 G and AUTH App 5.2.5 G (Approach to implementation of the IMD), AUTH App 5.11.7 G (Exclusions disapplied in connection with insurance mediation) and AUTH App 5.11.10 G (Activities carried on in the course of a profession or non-investment business).

01/08/2004

AUTH App 5.16.2

Text of article 2.3 of the Insurance Mediation Directive "'Insurance mediation' means the activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim.
These activities when undertaken by an insurance undertaking or an employee of an insurance undertaking who is acting under the responsibility of the insurance undertaking shall not be considered as insurance mediation.
The provision of information on an incidental basis in the context of another professional activity provided that the purpose of that activity is not to assist the customer in concluding or performing an insurance contract, the management of claims of an insurance undertaking on a professional basis, and loss adjusting and expert appraisal of claims shall also not be considered as insurance mediation."

01/08/2004

AUTH App 6

Guidance on the Identification of Contracts
of Insurance

AUTH App 6.1

Application

01/12/2004

AUTH App 6.1.1

This chapter is relevant to any person who needs to know what activities fall within the scope of the Act.

01/08/2004

AUTH App 6.2

Purpose of guidance

01/12/2004

AUTH App 6.2.1

The purpose of this guidance is to set out:

(1) at AUTH App 6.5 the general principles; and

(2) at AUTH App 6.6 the range of specific factors;

that the FSA regards as relevant in deciding whether any arrangement is a contract of insurance.

01/08/2004

AUTH App 6.2.2

This guidance includes (at AUTH App 6.7) a number of examples, showing how the factors have been applied to reach conclusions with respect to specific categories of business. Further examples may be published from time-to-time.

01/08/2004

AUTH App 6.3

Background

01/12/2004

AUTH App 6.3.1

The business of effecting or carrying out contracts of insurance is subject to prior authorisation and regulation by the FSA. (There are some limited exceptions to this requirement, for example, for breakdown insurance.)

01/08/2004

AUTH App 6.3.2

The Regulated Activities Order, which sets out the activities for which authorisation is required, does not attempt an exhaustive definition of a 'contract of insurance'. Instead, it makes some specific extensions and limitations to the general common law meaning of the concept. For example, it expressly extends the concept to fidelity bonds and similar contracts of guarantee, which are not contracts of insurance at common law, and it excludes certain funeral plan contracts, which would generally be contracts of insurance at common law. Similarly, the Exemption Order excludes certain trade union provident business, which would also be insurance at common law. One consequence of this is that common law judicial decisions about whether particular contracts amount to 'insurance' or 'insurance business' are relevant in defining the scope of the FSA's authorisation and regulatory activities, as they were under predecessor legislation.

01/08/2004

AUTH App 6.3.3

The Courts have not fully defined the common law meaning of 'insurance' and 'insurance business', since they have, on the whole, confined their decisions to the facts before them. They have, however, given useful guidance in the form of descriptions of contracts of insurance.

01/08/2004

AUTH App 6.3.4

The best established of these descriptions appears in the case of Prudential v. Commissioners of Inland Revenue [1904] 2 KB 658. This case, read with a number of later cases, treats as insurance any enforceable contract under which a 'provider' undertakes:

(1) in consideration of one or more payments;

(2) to pay money or provide a corresponding benefit (including in some cases services to be paid for by the provider) to a 'recipient';

(3) in response to a defined event the occurrence of which is uncertain (either as to when it will occur or as to whether it will occur at all) and adverse to the interests of the recipient.

01/08/2004

AUTH App 6.4

Limitations of this guidance

01/12/2004

AUTH App 6.4.1

Although what appears below is the FSA's approach, it cannot state what the law is, as that is a matter for the Courts. Accordingly, this guidance is not a substitute for adequate legal advice on any transaction.

01/08/2004

AUTH App 6.4.2

The list of principles and factors is not closed and this guidance by no means covers all types of insurance-like business.

01/08/2004

AUTH App 6.4.3

The FSA will consider each case on its facts and on its merits.

01/08/2004

AUTH App 6.4.4

In some cases transactions with the same commercial purpose or economic effect may be classified differently, ie some as insurance and some as non-insurance.

01/08/2004

AUTH App 6.5

General principles

01/12/2004

AUTH App 6.5.1

The starting point for the identification of a contract of insurance is the case of Prudential v. Commissioners of Inland Revenue [1904] 2 KB 658, from which the description set out in AUTH App 6.3.4 G is drawn. Any contracts that fall outside that description are unlikely to be contracts of insurance.

01/08/2004

AUTH App 6.5.2

The FSA will interpret and apply the description in AUTH App 6.3.4 G in the light of applicable legislation and common law, including case law.

01/08/2004

AUTH App 6.5.3

In particular, if the common law is unclear as to whether or not a particular contract is a contract of insurance, the FSA will interpret and apply the common law in the context of and in a way that is consistent with the purpose of the Act as expressed in the FSA's statutory objectives.

01/08/2004

AUTH App 6.5.4

The FSA will apply the following principles of construction to determine whether a contract is a contract of insurance.

(1) In applying the description in AUTH App 6.3.4 G, more weight attaches to the substance of the contract, than to the form of the contract. The form of the contract is relevant (see AUTH App 6.6.8 G (3) and (4)) but not decisive of whether a contract is a contract of insurance: Fuji Finance Inc. v. Aetna Life Insurance Co. Ltd [1997] Ch. 173 (C.A.).

(2) In particular, the substance of the provider's obligation determines the substance of the contract: In re Sentinel Securities [1996] 1 WLR 316. Accordingly, the FSA is unlikely to treat the provider's or the customer's intention or purpose in entering into a contract as relevant to its classification.

(3) The contract must be characterised as a whole and not according to its 'dominant purpose' or the relative weight of its 'insurance content': Fuji Finance Inc. v. Aetna Life Insurance Co. Ltd [1997] Ch. 173 (C.A.).

(4) Since only contracts of marine insurance and certain contracts of insurance effected without consideration are required to be in writing, a contract of insurance may be oral or may be expressed in a number of documents.

01/08/2004

AUTH App 6.6

The factors

01/12/2004

AUTH App 6.6.1

Contracts under which the provider has an absolute discretion as to whether any benefit is provided on the occurrence of the uncertain event, are not contracts of insurance. This may be the case even if, in practice, the provider has never exercised its discretion so as to deny a benefit: Medical Defence Union v. Department of Trade and Industry [1979] 2 W.L.R. 686. The degree of discretion required and the matters to which it must relate are illustrated in AUTH App 6.7.1 G (Example 1: discretionary medical schemes).

01/08/2004

AUTH App 6.6.2

The 'assumption of risk' by the provider is an important descriptive feature of all contracts of insurance. The 'assumption of risk' has the meaning in (1) and (3), derived from the case law in (2) and (4) below. The application of the 'assumption of risk' concept is illustrated in AUTH App 6.7.2 G (Example 2: disaster recovery business).

(1) Case law establishes that the provider's obligation under a contract of insurance is an enforceable obligation to respond (usually, by providing some benefit in the form of money or services) to the occurrence of the uncertain event. This guidance describes the assumption of that obligation as the 'assumption' by the provider of (all or part of) the insured risk. 'Transfer of risk' has the same meaning in this guidance.

(2) The case law referred to in (1) is Prudential v. Commissioners of Inland Revenue [1904] 2 KB 658, read with Hampton v. Toxteth Co-operative Provident Society Ltd [1915] 1 Ch. 721 (C.A.), Department of Trade and Industry v. St Christopher Motorists Assoc. Ltd [1974] 1 All E.R. 395, Medical Defence Union v. Department of Trade and Industry [1979] 2 W.L.R. 686 and Wooding v. Monmouthshire and South Wales Mutual Indemnity Soc. Ltd [1939] 4 All E.R. 570 (H.L.).

(3) The FSA recognises that there is a line of case law in relation to long-term insurance business that establishes that a contract may be a contract of insurance even if, having effected that contract, the provider 'trades without any risk'. The FSA accepts that the insurer's risk of profit or loss from insurance business is not a relevant descriptive feature of a contract of insurance. But in the FSA's view that is distinct from and does not undermine the different proposition in (1).

(4) The case law referred to in (3) is Flood v. Irish Provident Assurance Co. Ltd [1912] 2 Ch. 597 (C.A.), Fuji Finance Inc. v. Aetna Life Insurance Co. Ltd [1995] Ch. 122, Re Barrett; Ex parte Young v. NM Superannuation Pty Ltd, (1992) 106 A.L.R. 549, Fuji Finance Inc. v. Aetna Life Insurance Co. Ltd [1997] Ch. 173 (C.A.).

01/08/2004

AUTH App 6.6.3

Contracts, under which the amount and timing of the payments made by the recipient make it reasonable to conclude that there is a genuine pre-payment for services to be rendered in response to a future contingency, are unlikely to be regarded as insurance. In general, the FSA expects that this requirement will be satisfied where there is a commercially reasonable and objectively justifiable relationship between the amount of the payment and the cost of providing the contract benefit.

01/08/2004

AUTH App 6.6.4

Contracts under which the provider undertakes to provide periodic maintenance of goods or facilities, whether or not any uncertain or adverse event (in the form of, for example, a breakdown or failure) has occurred, are unlikely to be contracts of insurance.

01/08/2004

AUTH App 6.6.5

Contracts under which, in consideration for an initial payment, the provider stands ready to provide services on the occurrence of a future contingency, on condition that the services actually provided are paid for by the recipient at a commercial rate, are unlikely to be regarded as insurance. Contrast AUTH App 6.7.21 G (Example 7: solicitors' retainers) with AUTH App 6.7.22 G (Example 8: time and distance cover).

01/08/2004

AUTH App 6.6.6

The recipient's payment for a contract of insurance need not take the form of a discrete or distinct premium. Consideration may be part of some other payment, for example the purchase price of goods (Nelson v. Board of Trade (1901) 17 T.L.R. 456). Consideration may also be provided in a non-monetary form, for example as part of the service that an employee is contractually required to provide under a contract of employment (Australian Health Insurance Assoc. Ltd v. Esso Australia Pty Ltd (1993) 116 A.L.R. 253).

01/08/2004

AUTH App 6.6.7

Under most commercial contracts with a customer, a provider will assume more than one obligation. Some of these may be insurance obligations, others may not. The FSA will apply the principles in AUTH App 6.5.4 G, in the way described in (1) to (3) to determine whether the contract is a contract of insurance.

(1) If a provider undertakes an identifiable and distinct obligation that is, in substance an insurance obligation as described in AUTH App 6.5.4 G, then, other things being equal, the FSA is likely to find that by undertaking that obligation the provider has effected a contract of insurance.

(2) The presence of an insurance obligation will mean that the contract is a contract of insurance, whether or not that obligation is 'substantial' in comparison with the other obligations in the contract.

(3) The presence of an insurance obligation will mean that the contract is a contract of insurance, whether or not entering into that obligation forms a significant part of the provider's business. The FSA generally regards a provider as undertaking an obligation 'by way of business' if he takes on an obligation in connection with or for the purposes of his core business, to realise a commercial advantage or benefit.

01/08/2004

AUTH App 6.6.8

The following factors are also relevant.

(1) A contract is more likely to be regarded as a contract of insurance if the amount payable by the recipient under the contract is calculated by reference to either or both of the probability of occurrence or likely severity of the uncertain event.

(2) A contract is less likely to be regarded as a contract of insurance if it requires the provider to assume a speculative risk (ie a risk carrying the possibility of either profit or loss) rather than a pure risk (ie a risk of loss only).

(3) A contract is more likely to be regarded as a contract of insurance if the contract is described as insurance and contains terms that are consistent with its classification as a contract of insurance, for example, obligations of the utmost good faith.

(4) A contract that contains terms that are inconsistent with obligations of good faith may, therefore, be less likely to be classified as a contract of insurance; however, since it is the substance of the provider's rights and obligations under the contract that is more significant, a contract does not cease to be a contract of insurance simply because the terms included are not usual insurance terms.

01/08/2004

AUTH App 6.7

Examples

01/12/2004

Example 1: discretionary medical schemes

AUTH App 6.7.1

Medical schemes under which an employer operates or contributes to a fund, from which the employee has a right to a benefit (for example, a payment) on the occurrence of a specified illness or injury, are likely to be insurance schemes. This will be the case whether the employee makes any contribution to the fund, or the scheme is funded by the employer as an emolument. The scheme would not be insurance, however, if the employer has an absolute discretion whether or not to provide any benefit to the employee. Absolute discretion requires, for example, that the employer has an unfettered discretion both as to whether the employee will receive a benefit and as to the amount of that benefit. The absolutely discretionary nature of the benefits should also be clear from the terms of the scheme and any literature published about or in relation to it. If these requirements are met, it may not be relevant that, in practice, the employer has never refused to meet a valid claim under the scheme.

01/08/2004

Example 2: disaster recovery business

AUTH App 6.7.2

The disaster recovery provider sets up and maintains a range of IT and related facilities (PABX etc). The disaster recovery contracts so far considered by the FSA give the recipient, subject to certain conditions including an up front payment, priority access to all or a specified part of these facilities if a 'disaster' causes the failure of a similar business system on which the recipient relies. The provider sells access to the same facilities to a number of different recipients, both for use in response to 'disasters' and, more usually, for use in testing and refining the recipient's ability to switch to alternative systems in the event of a disaster.

01/08/2004

AUTH App 6.7.3

In principle, a significant part of disaster recovery business could potentially fall within the description of a contract of insurance set out in AUTH App 6.3.4 G. The provider undertakes, in consideration of a payment, to provide the recipient with services (alternative facilities) in response to a defined event (a disaster), which is adverse to the interests of the recipient and the occurrence of which is uncertain. The risk dealt with under the disaster recovery contract is a pure risk (see AUTH App 6.6.8 G (2)) and, at least at the commencement of the contract, the provider assumes that risk, within the terms of AUTH App 6.6.2 G.

01/08/2004

AUTH App 6.7.4

However, the disaster recovery contracts considered by the FSA had two key features.

(1) Priority access to facilities in the event of a disaster was expressed to be on a 'first come, first served' basis. The contracts provided expressly that if the facilities needed by recipient A were already in use, following an earlier invocation by recipient B, the provider's obligation to recipient A was reduced to no more than an obligation of 'best endeavours' to meet A's requirements. The entry into additional contracts of this kind did not increase the probability that the provider's existing resources would be inadequate to meet all possible claims. The terms of the contract were such that there was no pattern of claims that would cause the provider to have to pay claims from its own resources.

(2) In general, the contracts were priced so that the total consideration collected from the recipient over the life of the contract bore a reasonable and justifiable relationship to the commercial cost of the services actually provided to the recipient (see AUTH App 6.6.5 G). This was achieved, for example, by post-invocation charges levied according to the actual usage of services.

01/08/2004

AUTH App 6.7.5

Based on these features, the FSA reached the conclusion, with which the other terms of the contracts were consistent (AUTH App 6.6.8 G (3)), that these disaster recovery contracts were not contracts of insurance.

01/08/2004

AUTH App 6.7.6

An important part of the conclusion in AUTH App 6.7.5 G was that, although the provider assumed a risk at the outset of the contract, looking at the contract as a whole and interpreting the common law in the context of the FSA's objectives (see AUTH App 6.5.2 G and AUTH App 6.5.3 G) there was no relevant assumption of risk.

(1) The presence or absence of an assumption of risk is an important part of the statutory rationale for the prudential regulation of insurance.

(2) In Medical Defence Union v. Department of Trade and Industry [1979] 2 W.L.R. 686, the Court accepted that since there was no common law definition of a contract of insurance, the meaning of the term 'fell to be construed in its context according to the general law'. The Court recognised that in deciding whether a contract was a contract of insurance for the purposes of the Insurance Companies Act 1974, the 'context' included the purpose of the regulatory statute.

(3) Accordingly, when the common law is unclear, the FSA will assess the desirability of regulating a particular contract as insurance in the light of the statutory objectives in the Act. The FSA will use that assessment as an indicator of whether or not a sufficient assumption of risk is present for the contract to be classified as a contract of insurance at common law.

(4) In the case of disaster recovery contracts, the fact that there was no pattern of claims that would cause the provider to have to pay claims form its own resources led the FSA to conclude that there was no relevant assumption of risk by the disaster recovery provider.

01/08/2004

Example 3: manufacturers' and retailers' warranties

AUTH App 6.7.7

Under a simple manufacturer's or retailer's warranty the purchase price of the goods includes an amount, in consideration of which the manufacturer undertakes an obligation (the warranty) to respond (without further expense to the purchaser) to specified defects in the product that emerge within a defined time after purchase. When the warranty operates, the manufacturer or retailer provides repairs or replacement products in response to a defined event (the emergence of a latent defect in the product), which is adverse to the interests of the purchaser and the occurrence of which is uncertain. In summary, therefore, a simple manufacturer's or retailer's warranty is an identifiable and distinct obligation that is similar to and capable of being described as an insurance obligation in substance under AUTH App 6.3.4 G.

01/08/2004

AUTH App 6.7.8

Notwithstanding AUTH App 6.7.7 G, the FSA's view is that an obligation that is of the same nature as a seller's or supplier's usual obligations as regards the quality of the goods or services is unlikely to be an insurance obligation in substance.

01/08/2004

AUTH App 6.7.9

The FSA is unlikely to classify a contract containing a simple manufacturer's or retailer's warranty as a contract of insurance, if the FSA is satisfied that the warranty does no more that crystallise or recognise obligations that are of the same nature as a seller's or supplier's usual obligations as regards the quality of the goods or services.

01/08/2004

AUTH App 6.7.10

For the purpose of AUTH App 6.7.9 G, an obligation is likely to be of the same nature as the seller's or supplier's usual obligations as regards the quality of goods or services if it is an obligation of the seller to the buyer, assumed by the seller in consideration of the purchase price, which:

(1) implements, or bears a reasonable relationship to, the seller's statutory or common law obligations as regards the quality of goods or services of that kind; or

(2) is a usual obligation relevant to quality or fitness in commercial contracts for the sale of goods or supply of services of that kind.

01/08/2004

Example 4: separate warranty transactions and extended warranties

AUTH App 6.7.11

It follows from AUTH App 6.7.10 G that the FSA is unlikely to be satisfied that an obligation in a contract of sale or supply is of the same nature as the seller's or supplier's usual obligations as regards the quality of goods or services, if that obligation has one or more of the following features:

(1) it is assumed by a person other than the seller or supplier (a 'third party'); or

(2) it is significantly more extensive in content, scope or duration than a seller's usual obligations as to the quality of goods or services of that kind.

01/08/2004

AUTH App 6.7.12

Other things being equal, the FSA is likely to classify a contract of sale containing a warranty that has one or more of the features in AUTH App 6.7.11 G as a contract of insurance. The features in AUTH App 6.7.11 G (1) and (2) typically distinguish a 'third party' warranty and an 'extended warranty' from a 'simple' manufacturer's or retailer's warranty.

01/08/2004

AUTH App 6.7.13

If a warranty is provided by a third party, the FSA will usually treat this as conclusive of the fact that there are different transactions and an assumption or transfer of risk. This conclusion would not usually depend on whether the provider is (or is not) a part of the same group of companies as the manufacturer or retailer. But it will be the third party (who assumes the risk) that is potentially effecting a contract of insurance.

01/08/2004

AUTH App 6.7.14

A manufacturer or retailer may undertake a warranty obligation to his customer in a separate contract with the customer, distinct from the contract of sale or supply of goods or services. The FSA will examine the separate contract to see if it is a contract of insurance. But the mere existence of a separate warranty contract is unlikely to be conclusive by itself.

01/08/2004

AUTH App 6.7.15

A manufacturer or retailer may undertake an obligation to ensure that the customer becomes a party to a separate contract of insurance in respect of the goods sold. This would include, for example, a contract for the sale of a freezer, with a simple warranty in relation to the quality of the freezer, but also providing insurance (underwritten by an insurer and in respect of which the customer is the policyholder) covering loss of frozen food if the freezer fails. The FSA is unlikely to treat a contract containing an obligation of this kind as a contract of insurance. However, the manufacturer or retailer may be in the position of an intermediary and may be liable to regulation in that capacity.

01/08/2004

AUTH App 6.7.16

The FSA distinguishes the contract in AUTH App 6.7.15 G from a contract under which the manufacturer or retailer assumes the obligation to provide the customer with an indemnity against loss or damage if the freezer fails, but takes out insurance to cover the cost of having to provide the indemnity to the customer. The obligation to indemnify is of a different nature from the seller's or supplier's usual obligations as regards the quality of goods or services and is an insurance obligation. By assuming it, other things being equal, the manufacturer or retailer effects a contract of insurance. The fact that the manufacturer or retailer may take out insurance to cover the cost of having to provide the indemnity is irrelevant.

01/08/2004

Example 5: typical warranty schemes administered by motor dealers

AUTH App 6.7.17

The following are examples of typical warranty schemes operated by motor dealers. Provided that, in each case, the FSA is satisfied that the obligations assumed by the dealer are not significantly more extensive in content, scope or duration that a dealer's usual obligations as to the quality of motor vehicles of that kind, the FSA would not usually classify the contracts embodying these transactions as contracts of insurance.

(1) The dealer gives a verbal undertaking to the purchaser that during a specified period (usually 3 months) he will rectify any fault occurring with the vehicle. No money changes hands, and the dealer is responsible for meeting the warranty obligation.

(2) The dealer undertakes warranty obligations to his customer. The warranty obligations are either included in the contract for the sale of the vehicle or are set out in a separate contract between dealer and customer at the time of sale. The dealer administers his own warranty scheme and does not employ a separate company (for example a subsidiary) to run the scheme. In the event of a fault, the purchaser must contact the dealer, who is responsible for meeting the warranty obligation. The dealer decides whether or not to put money aside to meet potential claims.

(3) The dealer purchases proprietary warranty booklets issued by an administration company. These booklets contain 'terms and conditions' under which the dealer undertakes warranty obligations to the customer. The dealer sells these 'products' to his customer under a separate contract or inflates the price of the vehicle to include them as part of the sale of the vehicle. The administration company administers any claims that arise. The financial arrangements are that the dealer charges his customer for the warranty, passing a fee to the administration company for the purchase of the booklet and any administration relating to the processing of claims. The dealer retains all monies (less administration fee) received from the sale of the warranties and keeps any surplus after claims have been paid. The dealer is responsible for meeting the warranty obligation.

(4) The dealer undertakes warranty obligations to his customer. The warranty obligations are either included in the contract for the sale of the vehicle or are set out in a separate contract between dealer and customer at the time of sale. The dealer employs an administration company to handle all the claims and associated administrative work. The administration company usually has access to a bank account, funded by the dealer and specifically set aside to meet warranty claims. The administration company authorises and pays warranty claims from the bank account in accordance with the dealer's instructions. The dealer ultimately decides on the amount of claims payable from this account and retains all surplus monies. The dealer is responsible for meeting the warranty obligation.

01/08/2004

Example 6: tax investigation schemes

AUTH App 6.7.18

When self-assessment for income tax was first introduced, a number of providers set up schemes connected with their tax accounting and tax advisory services. In consideration of an annual fee, the provider undertakes to deal with any enquiries or investigations that the Inland Revenue might launch into the self-assessment that the provider completes for the recipient. The event covered by these schemes (an investigation) is both uncertain and adverse to the interests of the recipient, who would, if the scheme were not in place, have to devote resources to dealing with the investigation. Accordingly, these schemes fall within the description of a contract of insurance (see AUTH App 6.3.4 G).

01/08/2004

AUTH App 6.7.19

Some providers argued that these schemes amount to nothing more than a 'manufacturer's warranty' of their own work, within the scope of AUTH App 6.7.7 G (Example 3: manufacturers' and retailers' warranties). However, the Inland Revenue is expected to make a significant number of random checks of self-assessment forms, irrespective of the quality of the work done by the provider. These random checks are also covered by the schemes. The FSA concluded, therefore, that these schemes were not analogous to manufacturers' warranties and that the better view was that they were contracts of insurance.

01/08/2004

Example 7: solicitors' retainers

AUTH App 6.7.20

A contract under which a provider undertakes, in consideration of an initial payment, to stand ready to provide, or to procure the provision of, legal services on the occurrence of an uncertain event (for example, if the recipient is sued), is capable of being construed as a contract of insurance (see AUTH App 6.3.4 G). Indeed, legal expenses insurance is commonplace.

01/08/2004

AUTH App 6.7.21

If, however, a contract of this kind were structured so that the recipient was charged at a commercial rate for any legal services in fact provided, the FSA's approach will be to treat the arrangement as non-insurance. This is principally because, by taking on obligations of this kind, the provider does not assume a relevant risk (see AUTH App 6.7.6 G). The position might be different if the solicitor carries the additional obligation to pay for alternative legal services to be provided if the solicitor is unable to act. In that case, the FSA's approach will be to examine all the elements of the contract to determine whether the substance of the solicitor's obligation (see AUTH App 6.5.4 G (2)) is to insure, or to give legal advice for a fee.

01/08/2004

Example 8: contracts providing for ultimate repayment of any indemnity ('time and distance cover')

AUTH App 6.7.22

A contract under which a provider agrees to meet a specified obligation on behalf of the recipient (for example an obligation to pay for the re-purchase of shares or to meet a debt) immediately that obligation falls due, subject to later reimbursement by the recipient, would be a contract of insurance if in all other respects it fell within the description of such contract (see AUTH App 6.3.4 G). This is principally because the provider assumes the risk that an immediate payment will be required and, depending on the terms of the contract, may also assume the risk that the recipient will be unable to make future repayments (see AUTH App 6.6.2 G).

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Transitional Provisions and Schedules

AUTH TP 1

Transitional Provisions

AUTH TP 1.1

There are no transitional provisions in AUTH.
GEN contains transitional provisions that apply throughout the Handbook.

01/12/2004

AUTH Sch 1

Record Keeping Requirements

01/12/2004

AUTH Sch 1.1

There are no record keeping requirements in AUTH.

03/09/2001

AUTH Sch 2

Notification Requirements

01/12/2004

AUTH Sch 2.1

Handbook reference

Matter to be notified

Contents of notification

Trigger event

Time allowed

AUTH 3.9.3 D

Application for Part IV permission

Matters relevant to the application as indicated in the application pack

Application or significant changes to information given in the application

immediately applicant becomes aware

AUTH 5.3.9 D

Intention of incoming Treaty firm to carry on a regulated activity in the United Kingdom.

Matters relevant to the notice as indicated in the application pack.

Intention to carry on a regulated activity.

At least seven days in advance.

AUTH 6.3.1 D AUTH 6.3.4 D

Application for approval of person under section 59 of the Act

Matters relevant to the application as indicated in Form A and significant changes to information given in that Form

01/12/2001

AUTH Sch 3

Fees and other required payments

01/12/2004

AUTH Sch 3.1

Type of Fee

Trigger Event

Date/Time of Payment

Amount/Rate

Handbook reference

Certification Fee

Application for a certificate under article 54 of the Regulated Activities Order.

On or before the date on which application is made.

See AUTH 4 Annex 1, Part 6

AUTH 4.3

21/02/2002

AUTH Sch 4

Powers exercised

01/12/2004

AUTH Sch 4.1

The following powers and related provisions in the Act have been exercised by the FSA to make the rules in AUTH:

Section 156 (General supplementary powers)

Paragraph 17(1) of Schedule 1 (Fees).

The following power in the Act has been exercised by the FSA to give the guidance in AUTH:

Section 157(1) (Guidance).

The following powers in the Act have been exercised by the FSA in AUTH to direct and require:

Section 51 (Application under this Part).

Section 60 (Application for approval).

Paragraph 5(4) of Schedule 4 (Treaty Rights: Notice to Authority).

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AUTH Sch 5

Rights of action for damages

01/12/2004

AUTH Sch 5.1

The table below sets out the rules in AUTH contravention of which by an authorised person may be actionable under section 150 of the Act (Actions for damages) by a person who suffers loss as a result of the contravention.

If a "Yes" appears in the column headed "For private person?", the rule may be actionable by a "private person" under section 150 (or, in certain circumstances, his fiduciary or representative; see article 6(2) and (3)(c) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (SI 2001/2256)). A "Yes" in the column headed "Removed" indicates that the FSA has removed the right of action under section 150(2) of the Act. If so, a reference to the rule in which it is removed is also given.

The column headed "For other person?" indicates whether the rule may be actionable by a person other than a private person (or his fiduciary or representative) under article 6(2) and (3) of those Regulations. If so, an indication of the type of person by whom the rule may be actionable is given.

03/09/2001

AUTH Sch 5.2

Right of Action under section 150

Chapter/Appendix

Section/Annex

Paragraph

For private person?

Removed?

For other person?

All rules in AUTH 4

Yes

03/09/2001

AUTH Sch 6

Rules that can be waived

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AUTH Sch 6.1

The rules in AUTH 4 cannot be waived by the FSA.

03/09/2001