ENF 16
Collective investment schemes
ENF 16.1
Application and purpose
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Application
ENF 16.1.1
See Notes
This
chapter provides guidance on
the FSA's use
of its enforcement powers in relation to:
(1)
AUTs;
(2)
ICVCs;
and
(3)
recognised
schemes.
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Purpose
ENF 16.1.2
See Notes
The purpose of this chapter is to explain
the FSA's powers
in relation to the collective
investment schemes listed at ENF 16.1.1 G (1) to ENF 16.1.1 G (3) and to provide guidance on how the FSA intends to exercise
these powers. The effective use of these powers will help the FSA in pursuing its regulatory objectives of
protecting consumers,
maintaining market confidence and reducing financial crime.
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ENF 16.2
Authorised unit trust schemes
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ENF 16.2.1
See Notes
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ENF 16.2.2
See Notes
While the grounds upon which the powers
under sections 254 and 257 may be used are broadly similar, there are certain
material differences. These provisions are therefore set out separately in ENF
16.2.3 G to ENF
16.2.4 G and ENF
16.2.5 G to ENF
16.2.7 G respectively.
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Section 254: the power
ENF 16.2.3
See Notes
(1) The FSA's power
to revoke authorisation of
an AUT otherwise
than by consent is in section 254 (Revocation of authorisation order otherwise
than by consent).
(2) Section 254(1) states that 'An authorisation order may
be revoked by an order made by the FSA if
it appears to the FSA that:
(a) one or more of the requirements for the
making of the order are no longer satisfied;
(b) the manager or trustee of the scheme concerned has
contravened a requirement imposed on him by or under this Act;
(c) the manager or trustee of the scheme has, in purported
compliance with any such requirement, knowingly or recklessly given the FSA information which
is false or misleading in a material particular;
(d) no regulated
activity is being carried on in relation to the scheme and the period
of that inactivity began at least twelve months earlier; or
(e) none of paragraphs (a) to (d) applies,
but it is desirable to revoke the authorisation
order in order to protect the interests of participants or potential participants in the scheme'.
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ENF 16.2.4
See Notes
For the purposes of section 254(1)(e),
the FSA may,
under subsection 254(2), take into account 'any matter relating to- (a) the scheme; (b) the manager or trustee; (c) any person employed by or
associated with the manager or trustee in connection
with the scheme;
(d) any director of
the manager or trustee; (e) any person exercising influence
over the manager or trustee; (f) any body corporate in the
same group as
the manager or trustee; (g) any director of any such body corporate; (h) any person exercising influence
over any such body corporate'.
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Section 257: the power
ENF 16.2.5
See Notes
(1) Section 257(1) (Directions) contains
a power for the FSA to
give directions to the manager and trustee of an AUT.
(2) Section 257(1) states that 'The FSA may give a direction
under this section if it appears to the FSA that:
(a) one or more of the requirements for the
making of an authorisation
order are no longer satisfied;
(b) the manager or trustee of an AUT has contravened, or
is likely to contravene, a requirement imposed on him by or under this Act;
(c) the manager or trustee of such a scheme has, in purported
compliance with any such requirement, knowingly or recklessly given the FSA information which
is false or misleading in a material particular; or
(d) none of paragraphs (a) to (c) applies,
but it is desirable to give a direction in order to protect the interests
of participants or
potential participants in
such a scheme'.
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ENF 16.2.6
See Notes
(1) The types of directions the FSA may give under section
257 are explained in section 257(2).
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ENF 16.2.7
See Notes
Subsection 257(6) states that 'The FSA may, either on its
own initiative or on the application of the manager or trustee of the scheme concerned, revoke or vary a direction
given under this section if it appears to the FSA: (a) in the case of revocation, that
it is no longer necessary for the direction to take effect or continue in
force; (b) in the case of variation, that the direction should take effect
or continue in force in a different form'.
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Section 258: the power
ENF 16.2.8
See Notes
(1) Section 258(1) (Applications to the court)
states that 'If the FSA could
give a direction under section 257, it may also apply to the court for an
order:
(2) The types of direction the FSA may give under section
257 are explained in section 257(2) (see ENF 16.2.6 G (2)).
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ENF 16.2.9
See Notes
Section 258(2) states that the FSA may nominate a person for the purposes
of section 258(1)(b) only if it is satisfied that, if the order was made,
the requirements of sections 243 (4) to (7) would be complied with (these
requirements include, for example, that the manager and trustee are bodies corporate which are independent of
each other). If it appears to the FSA that
there is no person it
can nominate for these purposes, it may apply to the court under section 258(3)
for an order:
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Sections 254, 257, and 258: the FSA's policy
ENF 16.2.10
See Notes
The FSA will
consider all the relevant circumstances of each case when it decides whether
it is appropriate to use one or more of its powers under these sections of
the Act. The FSA may take a number
of factors into account when it decides whether to use the powers. The following
list is not exhaustive; not all these factors may be relevant in a particular
case and there may be other factors that are relevant.
(1) The seriousness of the breach or likely
breach by a manager or trustee of a requirement
imposed by or under the Act.
The following may be relevant:
(a) the extent to which the breach was deliberate
or reckless;
(b) the extent of loss, or risk of loss,
caused to existing, past or potential participants in
the AUT as
a result of the breach;
(c) whether the breach highlights serious
or systemic weaknesses in the management or control of either the AUT or the property subject
to the scheme;
(d) whether there are grounds for believing
a breach is likely to be continued or repeated;
(e) the length of time over which the breach
happened; and
(f) whether existing and/or past participants in the AUT have been misled in
a material way, for example about the investment objectives or policy of the scheme or the level of
investment risk.
(2) The consequences of a failure to satisfy
a requirement for the making of an order authorising an AUT. The FSA will
expect the non-compliance to be resolved as soon as possible. Important factors
are likely to be whether existing and/or past participants have suffered loss due to the
non-compliance and whether remedial steps will be taken to satisfy all the
requirements of the order.
(3) Whether it is necessary to suspend the issue and redemption of units to protect the
interests of existing or potential participants in
the AUT. For
example, this may be necessary if:
(a) information suggests the current price
of units under
the AUT may
not accurately reflect the value of the property subject to the scheme; or
(b) the property subject to the scheme cannot be valued
accurately.
(4) The effect on the interests of participants within the scheme of the use of
either or both of its powers under sections 254 and 257. However, the FSA will also consider
the interests of past and potential participants.
(5) Whether the FSA's concerns can be resolved by taking
enforcement action against the manager and/or trustee of the AUT. In some instances,
the FSA may
consider it appropriate to deal with a breach by a manager or trustee by taking direct enforcement action
against the manager and/or trustee without using
its powers under sections 254, 257, or 258. In other instances, the FSA may combine direct
enforcement action against a trustee and/or manager with the use of
one or more of the powers under sections 254, 257 and 258.
(6) Whether there is information to suggest
that a trustee or manager has knowingly
or recklessly given the FSA false
information. Giving false information is likely to cause very serious concerns,
particularly if it shows there is a risk of loss to the property subject to
the scheme or
that participants' interests
have been or may be affected in some other way.
(7) The conduct of the manager or trustee in relation to, and following the
identification of, the issue, for example:
(a) whether the manager or trustee discovered the issue or problem
affecting the AUT and
brought it to the FSA's attention
promptly;
(b) the degree to which the manager or trustee is willing to
cooperate with the FSA's investigation
and to take protective steps, for example by suspending the issue and redemption of units in the AUT;
(c) whether the manager or trustee has compensated past and existing participants who have
suffered loss.
(8) The compliance history of the trustee or manager, including whether
the FSA has
previously taken disciplinary action against the trustee or manager in relation to the AUT or any other collective investment scheme.
(9) Whether there is information to suggest
that the AUT is
being used for criminal purposes and/or that the manager or trustee is itself involved in financial crime.
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Choice of powers
ENF 16.2.11
See Notes
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ENF 16.2.12
See Notes
Where the FSA has a concern about an AUT that must be dealt with urgently, it will
generally use its power to give directions under section 257 in the first
instance (see ENF
16.2.5 G to ENF
16.2.7 G).
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ENF 16.2.13
See Notes
The following are examples of situations
where the FSA may
consider it appropriate to seek a court order under section 258 (see ENF
16.2.8 G) to remove the manager or trustee:
(1) where there are grounds for concern over
the behaviour of
the manager or trustee in respect of
the management of the scheme or
of its assets;
(2) where a manager or trustee has breached a requirement imposed
on him under the Act or
has knowingly or recklessly given the FSA false
information.
The FSA appreciates the effect
this action may have on the reputation of a manager or trustee and will use the power only where
this is proportionate in all the circumstances of the case.- 01/12/2004
ENF 16.2.14
See Notes
The FSA recognises
that participants in
an AUT have
a direct financial interest in the property subject to the scheme. It follows that in cases where it
considers it appropriate to use its section 254 power to revoke an authorisation order, the FSA will generally first
require the manager or trustee to wind up the AUT (or seek a court order
for the appointment of a firm to
wind up the AUT).
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ENF 16.3
ICVCs
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ENF 16.3.1
See Notes
Regulations for setting up, running and
regulating ICVCs are
contained in The Open-endedInvestmentCompanies
Regulations 2001 (SI 2001/1228). The regulations include the following enforcement
powers:
(2) a power for the FSA to give directions (regulation 25); and
(3) a power for the FSA to apply to court for the removal of
any director of
an ICVC or
its depositary (regulation
26).
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ENF 16.3.2
See Notes
The grounds upon which the FSA may use its powers
under regulations 23, 25 and 26 respectively are broadly similar to those
upon which it may use its equivalent enforcement powers in relation to AUTs (see ENF
16.2.1 G to ENF
16.2.9 G).
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ENF 16.3.3
See Notes
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Regulations 23, 25 and 26: the FSA's policy
ENF 16.3.4
See Notes
The factors the FSA may take into account when it decides
whether to use one or more of these powers include, but are not limited to,
factors which are broadly similar to those in ENF
16.2.10 G in the context of AUTs.
However, the relevant conduct will, of course, be that of the ICVC, the director or directors of the ICVC and its depositary (another difference
is that the FSA is
also able to take disciplinary action against the ICVC itself - see ENF
16.3.3 G). When choosing which powers to use, the FSA will adopt an approach
which is broadly similar to that described in ENF
16.2.11 G to ENF
16.2.14 G.
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ENF 16.4
Recognised schemes
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ENF 16.4.1
See Notes
Sections 264 to 283 of the Act relate to recognised schemes. These
provisions contain the following enforcement powers:
(1) the FSA's power
under section 267 to suspend promotion of a scheme constituted in another EEA State and recognised
under section 264 (Schemes constituted in other EEA States);
(2) the FSA's power
under section 279 to revoke recognition of:
(a) a scheme recognised
under section 270 (Schemes authorised in designated countries or territories);
and
(b) a scheme individually
recognised under section 272 (Individually recognised overseas schemes);
(3) the FSA's power
under section 281 to give directions in respect of the schemes identified
in ENF 16.4.1 G (2).
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Section 267: the power
ENF 16.4.2
See Notes
The FSA has
power under section 267 of the Act (Power
of Authority to suspend promotion of scheme) to suspend promotion of a scheme that is constituted
in another EEA State and
recognised under section 264. The power applies if it appears to the FSA that the operator of that scheme has communicated an invitation
or inducement in relation to the scheme in
a manner contrary to the financial
promotion rules. Under section 267(3), the suspension may last
for a set period, until a certain event has happened or until certain conditions
have been met. Under sections 267(4) and (5) the FSA may, either on its own initiative or
on the application of the operator of
the scheme concerned,
vary or revoke a direction suspending the scheme.
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Section 267: the FSA's policy
ENF 16.4.3
See Notes
When it decides whether a suspension
order under section 267 is appropriate, the FSA will consider all the relevant circumstances.
General factors that the FSA may
consider include, but are not limited to:
(1) the seriousness of the breach of financial promotion rules by
the operator (the
matters listed at ENF 16.2.10 G (1)(a) to ENF 16.2.10 G (1)(f) may be relevant in this context); and
(2) the conduct of the operator after the breach was discovered
including whether the operator has
compensated past and existing participants who
have suffered loss.
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ENF 16.4.4
See Notes
In addition to or instead of suspending
the promotion of a scheme recognised
under section 264, the FSA may
ask the competent authorities of
the EEA State in
which the scheme is
constituted who are responsible for the authorisation of collective investment schemes, to take such
action in respect of the scheme and/or
its operator as
will resolve the FSA's concerns.
Also, Schedule 5 to the Act (Persons
Concerned in Collective investment Schemes) states that a person who for the time being is an operator, trustee or depositary of a scheme recognised under
section 264 of the Act is
an authorised person.
So, it will also be open to the FSA to
take direct enforcement action against those persons.
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Section 279: the power
ENF 16.4.5
See Notes
(1) Section 279 of the Act (Revocation of recognition) relates to schemes recognised
under sections 270 and 272. Section 270 sets out the requirements for the
recognition of a collective
investment scheme which is not recognised under section 264
but which is managed and authorised in a country or territory designated for
the purposes of section 270. Section 272 sets out the requirements for the
recognition of a collective
investment scheme which is managed in a country or territory
outside the United Kingdom and
does not meet the requirements for recognition under section 264 or 270.
(2) Section 279 states that 'The FSA may direct that a scheme is to cease to
be recognised by virtue of section 270 or revoke an order under section 272
if it appears to the FSA:-
(a) that the operator, trustee or depositary of the scheme has contravened a requirement imposed
on him by or under this Act;
(b) that the operator, trustee or depositary of the scheme has, in purported compliance with
any such requirement, knowingly or recklessly given the FSA information which is false or misleading
in a material particular;
(c) in the case of an order under section
272, that one or more of the requirements for the making of the order are
no longer satisfied; or
(d) that none of paragraphs (a) to (c) applies,
but it is undesirable in the interests of the participants or potential participants that the scheme should continue to be recognised'.
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Section 281: the power
ENF 16.4.6
See Notes
Under section 281of the Act (Directions), the FSA can suspend the recognition
of a scheme recognised
under section 270 or section 272 for a set period, until a certain event happens
or until certain conditions are met. The grounds upon which the FSA may give a direction
under section 281 are broadly similar to those for the use of its power under
section 279 (see ENF
16.4.5 G).
The section 281 power may, however, also be used if it appears to the FSA that the operator, trustee or depositary of a scheme recognised under
section 270 or 272 is likely to breach a requirement imposed on him under
the Act.
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Sections 279 and 281: the FSA's policy
ENF 16.4.7
See Notes
The FSA will
consider all the relevant circumstances of each case when it decides whether
it is appropriate to use its powers under sections 279 and 281. The general
factors which the FSA may
consider include, but are not limited to, those set out in ENF 16.2.10 G (1) to ENF 16.2.10 G (9) (the
conduct of the operator of
the scheme and
of the trustee or depositary will also,
of course, be taken into account in relation to each of these factors).
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ENF 16.4.8
See Notes
As well as or instead of using these
powers, the FSA may
ask the relevant regulatory
body of the country or territory in which the scheme is authorised to take such action
in respect of the scheme and/or
its operator, trustee or depositary as will resolve
the FSA's concerns.
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ENF 16.5
Procedures and other relevant powers and provisions
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Procedures
ENF 16.5.1
See Notes
ENF
16 Annex 1 G lists
the procedures the FSA must
follow when using the powers discussed in this chapter.
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ENF 16.5.2
See Notes
More information on the procedures the FSA will follow when issuing statutory notices and
when deciding to use its powers to apply to court is contained in DEC
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Relevant powers and provisions other than those discussed in this chapter
ENF 16.5.3
See Notes
Section 238 of the Act (Restrictions on promotion) prohibits
a firm from
communicating an invitation or inducement to participate in a collective investment scheme unless
an exemption applies (the exemptions include the collective investment schemes listed in ENF 16.1.1 G (1) to ENF 16.1.1 G (3)). In addition, section 240 (Restriction
on approval of promotion) prohibits a firm from
approving the content of a communication relating
to a collective investment
scheme if the firm itself
would be prohibited from making the communication by
section 238. The FSA has
a range of powers for taking remedial, protective and disciplinary action
against a firm over
breaches of these prohibitions. These include the powers discussed in ENF 3 (Variation of Part IV permission
on the FSA's own-initiative), ENF 5 (Cancellation of Part IV permission on the FSA's own initiative), ENF 6 (Injunctions), ENF 9 (Restitution and redress), ENF 10 (Insolvency proceedings and orders against debt
avoidance), ENF 11 (Discipline of authorised firms
and approved persons: The FSA's general approach), ENF 12 (Discipline of authorised firms
and approved persons: Public censures and public
statements) and ENF 13 (Discipline of authorised firms
and approved persons: Financial penalties).
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ENF 16.5.4
See Notes
Unauthorised
persons are generally prohibited by sections 19 (The general
prohibition) and 21 (Restrictions on financial promotion) of the Act from being involved
in either the management or promotion of collective
investment schemes. The FSA's civil
and regulatory powers for dealing with breaches of these prohibitions include
those discussed in ENF 6, ENF 9 and ENF 10. An unauthorised person who breaches the prohibitions
in sections 19 or 21 will also be guilty of a criminal offence under the Act. The FSA's power to prosecute criminal offences
is discussed in ENF 15 (Prosecution of criminal
offences).
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ENF 16.5.5
See Notes
The FSA's investigation
powers in connection with AUTs, ICVCs, recognised schemes and other collective investment schemes are
discussed in ENF 2 (Information gathering
and investigation powers).
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ENF 16 Annex 1
Table of procedures for use of CIS powers (See ENF 16.5.1G)
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See Notes
| Power | Circumstance | Procedure |
| Section 254 | If the FSA is proposing to revoke a section 243 authorisation order under section 254(1) (see ENF 16.2.3 G and ENF 16.2.4 G) | Section 255 - Warning notice / decision notice (see DEC 3 and DEC 4) |
| Section 257 | If the FSA is proposing to give or vary on its own initiative a direction under section 257 (see ENF 16.2.5 G to ENF 16.2.7 G) | Section 259 - Supervisory notices (see DEC 4.6 and DEC 4.6). |
| Section 257 | If the FSA is proposing to refuse an application by a manager or trustee of a scheme under section 257(6) for a direction to be revoked or varied or to vary the direction otherwise than in accordance with the application (see ENF 16.2.7 G) | Section 260 - Warning notice / decision notice (see DEC 3 and DEC 4) |
| Section 257 | If the FSA decides on its own initiative to revoke a direction, or to revoke or vary a direction in accordance with a request by a manager or trustee under section 257(6) (see ENF 16.2.7 G) | Section 261 - Written notice |
| Section 258 | If the FSA is applying to the court for orders under section 258 (see ENF 16.2.8 G) | Section 258(6) Application and written notice (see DEC 4.6). |
| Section 267 | If the FSA is proposing to suspend promotion of a section 264 scheme under section 267 or to vary a direction suspending a scheme on its own initiative (see ENF 16.4.2 G) | Section 268 - Supervisory notices (see DEC 3 and DEC 4). |
| Section 267 | If the FSA is proposing to refuse an application by an operator under section 267(4) or (5) for a direction suspending a scheme to be varied or revoked or to vary the direction otherwise than in accordance with the application (see ENF 16.4.2 G) | Section 269(1) - (2) and (6) - Warning notice / decision notice (see DEC 2and DEC 4). |
| Section 267 | If the FSA decides on its own initiative to revoke a direction, or to revoke or vary a direction in accordance with a request by an operator (see ENF 16.4.2 G) | Section 269(4) - (6) - Written notice |
| Section 279 | If the FSA is proposing to direct that a section 270 scheme is no longer to be recognised or to revoke a section 272 order (see ENF 16.4.5 G) | Section 280 Warning notice / decision notice (see DEC 2 and DEC 4). |
| Section 281 | If the FSA is proposing to give or vary a direction under section 281 on its own initiative (see ENF 16.4.6 G) | Section 282 - Supervisory noticesDEC 3 and DEC 4 |
| Regulation 23 OEIC Regulations | If the FSA is proposing to revoke an authorisation order relating to an ICVC under regulation 23(1) (see ENF 16.3) | Regulation 24 - Warning notice / decision notice (see DEC 2DEC 4. |
| Regulation 25 OEIC Regulations | If the FSA is proposing to give or vary a direction under regulation 25 on its own initiative (see ENF 16.3) | Regulation 27- Supervisory notices (see DEC 3 and DEC 4). |
| Regulation 25 OEIC Regulations | If the FSA is proposing to refuse an application to revoke or vary a direction in accordance with a request under regulation 25(7) or to vary the direction otherwise than in accordance with the application. | Regulation 28 - Warning notice / decision notice (see DEC 2DEC 4 |
| Regulation 25 OEIC Regulations | If the FSA decides on its own initiative to revoke a direction, or to revoke or vary a direction in accordance with a request under regulation 25(7) | Regulation 29 - Written notice |
| Regulation 26 OEIC Regulations | If the FSA is applying to the court for an order under regulation 26 (see ENF 16.3) | Regulation 26(7) - Application and written notice (see DEC 4.6). |
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