NOTE: This document does not provide legal advice – it is only intended as a discussion draft to be updated
and modified to fit the circumstances. The publishers and authors shall not be liable to any person with
respect to any loss or damages caused or alleged to be caused directly or indirectly by the information or any
mistake in this document. In particular, all statutory references should be checked and users are reminded
that changes are continually being made to the law and the document will not be up to date. [25 August 2011]
DRAFT
LEGAL GUIDE:
FINANCIAL SERVICES AND MARKETS ACT 2000
THE FSA
Most of the Financial Services and Markets Act 2000 (“FSMA”) and the secondary legislation
and rules made there under came into force on 30th November, 2001.
The FSA is now the single regulator for the financial services industry and is responsible for
supervising banks, building societies, friendly societies, insurance companies and other financial
institutions (taking on the roles previously exercised by the Supervision and Surveillance
Department of the Bank of England, the Investment Management Regulatory Organisation
(IMRO), the Personal Investment Authority (PIA), the Securities and Futures Authority (SFA),
the Insurance Directorate of the Department of Trade and Industry, the Building Societies
Commission, the Friendly Societies Commission, and the Registry of Friendly Societies). The
FSA is also responsible for regulating credit unions and mortgage providers.
On 1st May, 2000 the FSA became the competent authority for listing in the UK (the UK Listing
Authority (UKLA)), taking over responsibility from the London Stock Exchange.
Constitution and objectives
When making rules, preparing and issuing codes, giving general guidance and determining the
general policy and principles the FSA is under a duty to act in a way that is compatible with, and
appropriate to meet, the objectives listed in FSMA (section 2, FSMA). These are:
 Maintaining market confidence.
 Promoting public understanding of the financial markets.
 Protecting consumers.
 Reducing financial crime.
Secondary legislation
The government has included a great deal of flexibility in the new framework by leaving much of
the detail to secondary legislation. The new regime will comprise over 80 pieces of secondary
legislation and several volumes of detailed rules.
RULES AND GUIDANCE
The regulatory framework is contained within the following sources:
Handbook. This sets out all the rules and guidance made under FSMA. The Handbook aims to
harmonise, consolidate and rationalise the principles, rules and guidance issued by the existing
regulators, including the SROs, and to provide a single point of reference for users.
Principles for Businesses. The FSA has published the 11 principles, known as the Principles for
Businesses, which will apply to all authorised firms. These state the fundamental obligations of
regulated businesses. They provide a benchmark for firms to order their behaviour by and a basis
LEGAL GUIDE – FINANCIAL SERVICES AND MARKETS ACT 2000
for supervisory and enforcement activity by the FSA. Their application is new for banks, building
societies, general insurance companies and businesses that are regulated for the first time.
Endorsement of Takeover Code. The FSA has also made rules providing important statutory
support to the Takeover Panel including requiring certain persons not to act for those in breach of
the Takeover Code's provisions (the "cold shoulder rules").
Other significant rules. FSMA gives the FSA a new power to make rules relating to the
prevention and detection of money laundering and power to institute proceedings under the
Money Laundering Regulations 1993. The rules do not replace, or form guidance to, the Money
Laundering Regulations 1993; they are a separate set of parallel rules that cover areas such as the
requirement to identify new clients, the records that the FSA expects firms to keep and the
appointment and responsibilities of the money laundering reporting officer.
REGULATED ACTIVITIES
A person is prohibited from carrying on a regulated activity in the UK, or purporting to do so,
unless authorised or exempt (the 'general prohibition') (section 19, FSMA). Contravention of the
general prohibition is a criminal offence and resulting agreements are unenforceable (section 26,
FSMA). Agreements made by authorised persons (in the course of their authorised business) may
also be unenforceable if the agreement is entered into as a result of a third party's unauthorised
regulated activities (section 27, FSMA).
The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544)
(Regulated Activities Order), establishes the activities to be regulated under FSMA if carried on
by way of business. The activities include:
 Investment activities, that is, dealing in investments as principal or as agent; arranging
deals in investments; managing investments; safeguarding and administering investments;
sending dematerialised instructions; establishing, operating or winding up collective
investment schemes; advising on investments; and agreeing to carry on any of these
activities (except establishing, operating or winding up collective investment schemes).
 Deposit-taking.
 Effecting and carrying out contracts of insurance.
 Certain new activities, that is, establishing, operating or winding up a stakeholder pension
scheme; activities relating to the Lloyd's market; providing funeral plan contracts; and
providing regulated mortgage contracts.
Regulated mortgage contracts. There are also new regulated activities of entering into a
regulated mortgage contract or administering a regulated mortgage contract. A regulated mortgage
contract is a contract under which the lender provides credit to a borrower and the obligation of
the borrower to repay is secured by a first legal mortgage on land in the UK, at least 40% of
which is or is to be used as or in connection with a dwelling by the borrower or related person.
A person will be administering a regulated mortgage contract if he notifies the borrower of
changes in interest rates or payments due under the contract and/or takes any necessary steps for
the purposes of collecting or recovering payments due under the contract from the borrower.
Exclusions
Part II of the Regulated Activities Order sets out the exclusions applicable to each kind of activity.
New or significantly changed exclusions include:
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Dealing with or through an authorised person. A person dealing as agent or arranging a
transaction for a client with or through an authorised person will not need to be authorised where:
 the transaction is entered into on advice given to the client by an authorised person;
 it is clear that the client has not sought advice from the agent or arranger;
and the agent or arranger does not receive any benefit from the deal (from any person) for which
he does not account to the client. This exclusion may assist the establishment of cheap dealing
facilities for small shareholders and other similar arrangements.
Specified investments
Part III of the Regulated Activities Order specifies the investments that are relevant in
determining whether a person is carrying on a regulated activity. These include deposits, rights
under contracts of insurance and all the investments in Part I of Schedule 1 to the 1986 Act as
well as the investments corresponding to the new activities.
By way of business test
An activity is only a regulated activity if it is carried on "by way of business" (section 22, FSMA).
The Treasury is given the power to specify the circumstances in which a person will and will not
be regarded as carrying on a regulated activity by way of business (section 419, FSMA).
AUTHORISATION
Under FSMA there is a single authorisation process for all types of firm seeking to carry on one or
more regulated activities. An applicant must apply to the FSA for a Part IV permission to carry on
a regulated activity (or activities) and any person that is granted such a permission by the FSA is
authorised. FSMA also provides for the automatic authorisation (subject to certain conditions and
notifications) of:
 Firms "passporting" into the UK under, for example, the Investment Services Directive
(93/22/EC), the Second Banking Coordination Directive (89/646/EEC) or the Third Life
and Non-Life Insurance Directives (92/96/EEC) and (92/49/EEC).
 Firms exercising EC Treaty rights.
(Section 31(1) and Schedules 3 and 4, FSMA.)
A firm needs to obtain permission for each of the regulated activities it wishes to carry on,
although a single permission may encompass a number of regulated activities. In addition to
completing the required application forms, an applicant is required to satisfy the "threshold
conditions" (that is, the qualifying conditions for authorisation) (Schedule 6, FSMA). These cover
location of head and registered office, the nature of any close links with another person and
require, for example, the applicant to be fit and proper and to have adequate resources.
An application for a Part IV permission must be determined by the FSA within six months from
the date on which it is received if it is a complete application.
Approved persons regime
FSMA provides for a single regime of individual approval, under which individuals who carry out
specified controlled functions within authorised firms require prior approval from the FSA. The
FSA rules divide the controlled functions into "governing functions", "required functions",
"systems and controls functions", "significant management functions" and "customer functions".
ACTIONS FOR DAMAGES
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Private persons have a right of action for damages for losses arising as a result of breach of a rule
by an authorised person (section 150, FSMA).
FINANCIAL PROMOTION
A person is prohibited in the course of business from communicating an invitation or inducement
to engage in investment activity unless that person is an authorised person or the communication
has been approved by an authorised person (section 21, FSMA). The term "communicate" includes
causing a communication to be made. Breach of section 21 is a criminal offence and any resulting
contract is unenforceable against the other party.
Scope
The new regime is relevant to both authorised and unauthorised entities. An authorised person
proposing to issue or approve a communication falling within section 21 of FSMA must also
comply with financial promotion rules issued by the FSA (Chapter 3, FSA's Conduct of Business
Sourcebook). An unauthorised person will have to obtain approval of the communication by an
authorised person or fall within an exemption.
The new regime is broader than those which it replaces and affects all communications. For
example, the basic prohibition in section 21 of FSMA will prevent solicited calls by unauthorised
persons; under the 1986 Act, there are no restrictions on solicited calls by unauthorised persons
except where the communications might also be considered to be an investment advertisement.
The prohibition only applies to communications by a person acting "in the course of business".
The territorial scope of the new regime is far reaching. It applies to communications originating
inside the UK, including those made only to people outside the UK, and to communications
originating outside the UK that are capable of having an effect in the UK. For example, a
communication posted on a website in Spain is caught (subject to any relevant exemptions) if UK
investors can access it.
Financial Promotion Order
The breadth of the new prohibition is scaled back by the exemptions in the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2001 (SI 2001/1335). The Treasury's aim has been
to retain (as far as possible) the substance of the existing exemptions and to clarify and rationalise
these where possible. Some have been extended to promotions relating to deposit-taking and
general insurance business. The order also contains some new exemptions (for example, the
exemption for promotions to high net worth individuals to facilitate capital raising for unlisted
ventures).
Real time and non-real time communications. The exemptions in the Financial Promotions
Order distinguish between real time communications and non-real time communications. A real
time communication is "any communication made in the course of a personal visit, telephone
conversation or other interactive dialogue" (Article 7(1)). A non-real time communication is
anything else, for example, communications made by letter, e-mail, via websites, sound and
television broadcasts or contained in a publication.
Real time communications are sub-divided into solicited and unsolicited communications. A real
time communication will be solicited where it is made in the course of a call, visit or dialogue:
 Initiated by the recipient of the communication.
 Made in response to an express request from the recipient (Article 8(1)).
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There are fewer exemptions for unsolicited real time communications on the basis that recipients
will need more protection in this situation. Some exemptions require certain indications to be
included in the communication. These must be presented in a way that can easily be understood
and in a manner best calculated to bring the matter to the attention of the recipient and to allow
him to consider it (Article 9). The general approach of the order is to permit exemptions to be
combined, with the exception of the exemption relating to communications directed at persons
outside the UK, which can only be combined with two other specified exemptions (Article 11).
Exemptions. Some of the more important new exemptions include:
 Communications to overseas recipients. Any non-real time or solicited real time
communication made from inside or outside the UK will be exempt if:
it is made to a person who receives the communication outside the UK (Article 12(1)(a));
or
it is directed only at persons outside the UK (Article 12(1)(b)).
 One off communications. There is a new exemption for one off non-real time or solicited
real time communications (Article 28). A communication will be regarded as a one off if:
it is made only to one recipient or to one group who it is expected will engage in any
investment activity jointly; the relevant product or service has been determined having
regard to the particular circumstances of the recipient; and it is not part of an organised
marketing campaign. If only one or two of these conditions are satisfied, these will be
taken into account in determining whether a communication is one off.
 Communications to certified high net worth individuals (Article 48). This exemption has
been introduced as part of the attempt to facilitate capital raising from "business angels"
and other sources of informal capital for start up and small companies.
Non-real time and solicited real time communications can be made to a person who has a current
certificate of high net worth from an accountant or his employer confirming his annual income is
not less than £100,000 or his net assets are not less than £250,000. In addition, he must have
signed a statement in the previous 12 months confirming he is a certified high net worth
individual (as set out in Article 48(2)(b)). The communication must be made to an identified
individual and only if it relates to particular investments (broadly, unquoted securities and funds
which invest in unquoted securities). The communication cannot relate to investment activity
involving the person who has given the certificate.
 Communications to certified sophisticated investors. This exemption also allows
promotions to individuals (Article 50). A communication can be made to a person who has
a current certificate signed by an authorised person stating that he is sufficiently
knowledgeable to understand the risks associated with the particular investment and who
has signed a certificate about his status containing a statement as prescribed by Article
50(1)(b). The communication must be accompanied by certain statements or indications
listed in Article 50(3), for example, it must indicate that it is exempt from the general
restriction in section 21 of FSMA. Again, the recipient will have to have his certificate
before the communication can be made to him and the communication cannot relate to
investment activity involving the person who has given the certificate.
MARKET ABUSE
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Part VIII of FSMA introduces a new civil regime relating to market abuse (although the regime is
regarded as criminal for the purposes of the 1998 Act). This regime will supplement rather than
replace the existing criminal regimes for insider dealing (Part V, Criminal Justice Act 1993)
(1993 Act) and market manipulation (section 397, FSMA which reproduces with minor variations
section 47 of the 1986 Act relating to misleading statements and practices). It is wider than both
and, in particular, effectively extends an insider dealing regime into the commodities and energy
markets.
The new market abuse regime applies to all persons, whether or not authorised, and to on- and
off-market behaviour. Those who commit market abuse can be punished by an unlimited fine or
public censure, ordered to make restitution and restrained by injunction. Most of these sanctions
are also available against a person who requires or encourages another to engage in behaviour
which, if engaged in by the first person would have amounted to market abuse.
Code of Market Conduct
Section 119 of FSMA requires the FSA to issue a code containing "such provisions as the
Authority considers will give appropriate guidance to those determining whether or not behaviour
amounts to market abuse". This is the Code of Market Conduct (the Code).
The purpose of the Code is to assist market users in determining whether or not behaviour
amounts to market abuse. To the extent that the Code contains descriptions of behaviour which,
in the FSA's opinion, does not amount to market abuse, that behaviour is regarded conclusively as
not amounting to market abuse (section 122(1), FSMA). Otherwise, the Code has only evidential
effect and may be relied on only in so far as it indicates whether or not behaviour should be taken
as amounting to market abuse.
Elements of market abuse
In order for behaviour to amount to market abuse it must:
Occur in relation to qualifying investments traded on a prescribed market. The Treasury has
the power to specify the investments and markets to which the market abuse regime applies. In
March 2001 Parliament approved the Financial Services and Markets Act 2000 (Prescribed
Markets and Qualifying Investments) Order 2001 (SI 2001/996) which prescribes (for the
purposes of section 118(3) of FSMA) any investment of a kind admitted to trading under the rules
of any of the markets of a recognised investment exchange (RIE). The UK RIEs are currently the
London Stock Exchange, LIFFE, the London Metal Exchange, the International Petroleum
Exchange, OMLX, COREDEAL, Jiway Ltd and virt-x Exchange Ltd.
Satisfy the section 118(2) conditions. Behaviour must satisfy one or more of the following
conditions before it may amount to market abuse (section 118(2), FiISMA):
 It must be based on information which is not generally available to those using the market,
but which if it were available to a regular user of the market, would be regarded by him as
relevant when entering into transactions in relevant investments. Unlike the 1993 Act
(which requires actual knowledge that information is inside information and that the
possessor has it from an inside source), the condition simply applies where the information
is unavailable. The Code equates relevant information with inside information for the
purposes of the insider dealing legislation but also states that information must be such
that a regular user of the market in question would reasonably expect to be disclosed to
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users of the market on an equal basis. The Code also explains that such information
comprises two broad categories:
 information required to be disclosed under a legal or regulatory obligation (disclosable
information), for example, information which is required to be disclosed under the Listing
Rules; and
 information which is usually subject to some form of public announcement, while not
being subject to any formal disclosure requirement (announceable information), for
example, government announcements.
 It must be likely to give a regular user a false or misleading impression as to the supply of,
demand for or as to the price or value of relevant investments. This condition is similar in
scope to section 397 of FSMA (see above) and uses the same terminology. The test is
objective in that the behaviour must be likely to give a regular user a false or misleading
impression.
 It must be likely to be regarded by a regular user as behaviour which would, or is likely to,
distort the market in relevant investments. As in the case of false and misleading
impressions, the test is objective, that is, whether a regular user would or would be likely
to regard the behaviour as distortion.
Regular user test. The behaviour must also be likely to be regarded by a regular user as a failure
on the part of the person concerned to observe the standard of behaviour reasonably expected of a
person in their position (regular user test). "Regular user" is defined as "in relation to a particular
market, ... a reasonable person who regularly deals on that market in investments of the kind in
question." Behaviour is caught if it occurs in the UK, whether or not on a prescribed market, or
outside the UK if it relates to qualifying investments traded on a prescribed market.
The "regular user" provides the benchmark for determining whether a person has deviated from
acceptable market practices. He is described in the Code as a "hypothetical reasonable person who
is familiar with the market in question and the test to be applied is whether, as an objective matter,
such a person would regard the behaviour in question as acceptable in the light of all relevant
circumstances". Market abuse is defined by reference to market standards expected of a person in
the position of the alleged market abuser, as determined by the regular user. Therefore, although
FSMA does not specify any required state of mind (such as intent, recklessness or negligence), the
regular user is likely to import one appropriate to the circumstances of the case.
To determine whether behaviour in relation to a particular market amounts to market abuse, it is
necessary first to identify the hypothetical regular user of that market and then to determine the
standards of behaviour that that regular user would expect from a person in the same position as
the alleged abuser. This will not necessarily be a simple task.
Safe harbours
FSMA provides limited "safe harbour" provisions (sections 118(8), and 122(1), FSMA):
 Behaviour does not amount to market abuse if it conforms with certain FSA rules. The
Code specifies the price stabilisation rules (which provide a defence against the criminal
offences of price (or market) manipulation and insider dealing), the Chinese wall rules and
certain of the Listing Rules for this purpose.
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
There is a safe harbour for behaviour which is described in the Code as not amounting to
market abuse. This includes behaviour which complies with certain provisions of the
Takeover Code and the Listing Rules.
Issues for listed companies
There are three areas worth highlighting:
 The Code provides that a person responsible for submitting information to an accepted
channel (such as the London Stock Exchange Regulatory News Service) will commit
market abuse if that information creates a false or misleading impression of the relevant
kind and the person has failed to take reasonable care to ensure the information was not
false or misleading (MAR 1.5.18, the Code).
 The Code indicates that the FSA takes the view that early or selective disclosure of
disclosable or announceable information will generally amount to requiring or
encouraging unless the discloser has a legitimate purpose for making it (for example,
because it is permitted or required by the rules of the London Stock Exchange or the
Takeover Code). The guidance also indicates that disclosures should be accompanied by
specified warnings about confidentiality and resulting behaviour. This provides further
support to the general approach the FSA is taking on selective disclosure and another
reason why listed companies need to be careful in their dealings with analysts.
 The Code includes provisions giving safe harbours in relation to certain of the Listing
Rules and dealing with the Model Code on Directors' Dealings. Companies will need to
ensure that their own model codes and the procedures adopted under them take into
account these provisions and the views of the FSA on requiring and encouraging.
OTHER KEY PROVISIONS
Other key provisions in FSMA include:
Exchanges and clearing houses
The FSA is currently responsible for the recognition of UK investment exchanges and clearing
houses. However, FSMA also gives the FSA responsibility for the recognition of overseas
exchanges and clearing houses (which are currently recognised by the Treasury) (section 292,
FSMA).
Business transfers
The special nature of the business of financial institutions means that it may be difficult to transfer
such businesses solely by contractual means. As a result, significant banking transfers have tended
to be carried out under a private Act of Parliament. However, Part VII of FSMA introduces a new
mandatory regime under which transfers of banking or insurance businesses must be sanctioned
by the court.
Insolvency
FSMA introduces provisions that aim to harmonise the rules governing the regulators' powers on
the insolvency of financial institutions and regulated bodies. Under Part XXIV of FSMA the FSA
can:
 Initiate most types of insolvency proceedings against regulated persons and bodies.
 Commence winding up petitions against bodies that are (or have been) carrying on a
regulated activity without permission.
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
Participate in insolvency proceedings and creditors' meetings involving regulated bodies.
Insolvency office holders are also required to provide information to the FSA.
Change of control
FSMA standardises the change of control regimes currently applicable to UK investment firms,
banks and insurance companies. As now, a person who is proposing to take a step which will
result in that person acquiring "control" over an authorised firm must give advance notice to the
FSA and may not proceed with the proposed action until the FSA has confirmed that it does not
object. In addition, that person must notify the FSA after it has acquired the "control". A similar
requirement applies where a person proposes certain changes to the level, or to the nature, of its
existing control of an authorised firm. There is also a general duty to give prior notification to the
FSA of any proposal to cease to have control over a regulated firm or to reduce an existing control
from specified thresholds. Breach of any of these requirements remains a criminal offence.
The listing regime
Under FSMA the FSA continues in its role as the UKLA with responsibility for the admission of
securities to listing, the discontinuance and suspension of listings, and the approval of listing
particulars, prospectuses and sponsors. Part VI of FSMA deals with the duties of the competent
authority, which are broadly the same as the existing provisions in Part IV of the 1986 Act.
Section 73(2) of FSMA sets out the competent authority's general functions of making rules,
giving general guidance and determining the general policies and principles by reference to which
it performs those functions. In discharging these functions the UKLA is required to have regard to
the principles of good regulation.
The FSA also has the power to impose penalties on issuers of listed securities and applicants for
listing for breach of the listing rules and, in certain circumstances, it may publicly censure a
sponsor.
Compensation and ombudsman schemes
Part XV of FSMA provides for the existing compensation schemes operating in the financial
services, banking and insurance sectors (including the Policyholder Protection Scheme, the
Deposit Protection Scheme and the Friendly Societies Protection Scheme) to be replaced with a
single compensation scheme, to be set up by the FSA. The aim of the scheme is to compensate
customers who suffer financial loss as a consequence of the inability of a regulated firm to meet
its liabilities arising from claims made in connection with regulated activities (even if the claim
arises in relation to an activity for which that regulated firm did not have permission). FSMA also
provides for the creation of a single Financial Ombudsman Scheme, which is to operate
independently of the FSA and replace all of the existing ombudsman and arbitration schemes
currently operating in the financial services, banking and insurance sectors, including the Office
of the Banking Ombudsman, the SFA Complaints Bureau and the Insurance Ombudsman Bureau.
The Ombudsman and Compensation Schemes are much broader than the existing schemes. For
example, it is compulsory for all authorised firms to be members of both. In relation to the
Compensation Scheme, it is proposed that the maximum amount payable on claims relating to
deposits should be increased from £18,000 to £31,700 and that cover for non-compulsory general
insurance should be extended to small companies.
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