121/00
26 October 2000
DELIVERING BETTER FINANCIAL REGULATION
Domestic mortgage holders and purchasers of pre-paid funeral plans are among those who will benefit from detailed proposals on the scope of financial regulation published by the Treasury today.
Welcoming publication, Economic Secretary Melanie Johnson said :
?These proposals bring the consumer and industry benefits of the new Financial Services and Markets Act a step closer.
?They show that almost all domestic residential mortgages will benefit from regulatory protection, under a single regulatory regime overseen by a single regulator, and that the protection will extend to innovative new products such as flexible mortgages.
?The announcements are also reassuring news for those considering taking out pre-paid funeral plans. All such schemes will deliver protection for purchasers? payments, with regulation by the Financial Service Authority where necessary.
?Other proposals will ensure protection embraces equally all avenues of financial promotion, whether exciting new technologies such as interactive broadcasting and the internet, or more traditional newspaper, telephone, television and radio promotion.
?Together, these detailed proposals show our commitment to delivering effective, appropriate protection where needed, while enabling the financial services industry to keep up with the challenge of change, to modernise, and to extend and improve competition to the benefit of both consumers and industry.
?We welcome responses from consumers and from all sections of the financial services industry to ensure that the right protections are delivered in the best way.?
Draft orders, and a separate consultation document on mortgages, published today seek views on the appropriate regulatory framework to be applied in secondary legislation under the Financial Services and Markets Act 2000 (FSMA).
Further information about the regulated activities consultation document and proposals to regulate domestic residential mortgages, pre-paid funeral plan arrangements and the financial promotion consultation document are attached.
NOTES TO EDITORS
The Financial Services and Markets Bill was published in July 1998. Following extensive public consultation and Parliamentary scrutiny the Bill received Royal Assent on 14 June 2000.
Internal links
The consultation documents and draft orders published today mark a significant further stage in progress towards implementation of the FSMA. Now that detailed proposals for the scope of the regulation of mortgages have been published, the FSA will be able shortly to go to public consultation on issues concerning how the regulation will operate.
The draft secondary legislation consulted on in the papers published today will be among the first that the Government lays before Parliament in the New Year. Further consultation on other secondary legislation, including transitional arrangements, will follow.
Media enquiries should be addressed to Charles Keseru in the Treasury Press Office on 020 7270 5188.
REGULATING MORTGAGES
The consultation document published by the Treasury today seeks views on the scope of the regulation of mortgages and mortgage lending proposed in January 2000 to give protection to people borrowing for a mortgage on a family home.
The consultation document makes it clear that there will be a single regulatory regime for domestic residential mortgages under the Financial Services and Markets Act 2000, avoiding duplication or overlap with Consumer Credit Act 1973 provisions.
It also makes it clear that regulation will apply to innovative new products such as flexible mortgages as well as the range of more traditional mortgage products.
The consultation document considers detailed definitions for how regulation should cover :
- mortgage loans
- lending and lending related processes
- lending firms
- related consumer lending
- loans sold or transferred to others.
The proposed legislation is a straightforward concept in principle, but its delivery requires careful definition. The definitions proposed today should ensure that the sale of virtually all retail residential mortgages on UK properties will be regulated.
BACKGROUND NOTES
1. The decision to regulate information about mortgages and to introduce CAT standard mortgages was announced by Economic Secretary Melanie Johnson on 26 January.
2. The consultation document published today sets out for discussion issues concerning implementation of the policy on mortgage regulation announced in January. This will be implemented by the Financial Services Authority (FSA).
3. Responses to the consultation document should be sent to the Treasury by 20 December 2000. They should be addressed to :
Gerry Foley
HM Treasury
Allington Towers
19 Allington Towers
LONDON
SW1E 5EB
Tel: 020 7270 5292
Fax: 020 7270 4694
4. Media enquiries should be addressed to Charles Keseru at the Treasury press office on 020 7270 5188.
5. Non-media enquiries should be addressed to the Treasury Public Enquiry Unit on 020 7270 4558 or to Gerry Foley as above.
PROTECTING PRE-PAID FUNERAL PLANS
Consumer protections set out in the new Financial Services and Markets Act will benefit all those who purchase pre-paid funeral plans, Economic Secretary Melanie Johnson announced today.
Pre-paid funeral plan providers will be regulated directly and require authorisation by the Financial Services Authority (FSA) unless the schemes that they offer meet strict criteria for exemption. Payments into exempt schemes will be protected indirectly through authorisation of supporting insurance or investment arrangements.
Miss Johnson said :
This is reassuring news for anyone thinking of buying a pre-paid funeral plan. It means that all such schemes will be protected by regulation delivered under the new Financial Services and Markets Act.
?Funeral plan providers of schemes which do not meet the stringent safeguard requirements for exemption will be regulated by the FSA.
?These safeguards require the protection of savers? funds through suitable insurance or trust arrangements, with FSA authorised investment managers and clear conditions to ensure that these can only be used to provide the funerals promised.?
If a scheme does not meet the criteria for exemption from FSA regulation of the plan provider, the provider will need to seek authorisation from the FSA to carry on the business. Once the provider is authorised, consumers will receive the full range of FSMA protections if products are mis-sold. In addition the FSA will be able to apply to the courts to stop any unauthorised, non-exempt business.
Authorised firms will need to comply with FSA rules and can be fined if they breach these. If a customer is dissatisfied with a product from an authorised firm, they should in first instance complain directly to the firm. If they are not satisfied, they can seek redress through the independent Financial Services Ombudsman, who has the powers to order compensation in appropriate cases.
The measures announced today will be given effect through secondary legislation to be made under the Financial Services and Markets Act 2000 (FSMA).
The Treasury will carry out further consultation with the industry on the detail of these criteria, but in principle, to be exempt from regulation, schemes must either :
- be backed by suitable insurance, ensuring that plans are backed by an authorised insurance company
or - hold purchasers' money in a trust administered by a third party, which must provide:
- legal constitution under a trust deed.
- trust funds are legally separate from the funeral director or plan provider
- independent trustees whose duties will be laid out in a trust deed
- funds can only be withdrawn from the trust for specified purposes, ie to pay funeral directors after the funeral, or to refund savers if they withdraw from the plan
- authorised independent investment managers with strict investment criteria
- regular actuarial assessments from independent actuaries
- annual audited accounts.
BACKGROUND NOTES
Pre-paid funerals are arrangements to pay in advance for a funeral. They are usually made directly with the funeral director, but they can be made with a pre-paid funeral plan provider. Payment may be in a lump sum or in instalments over a maximum of ten years.
Treasury research suggests that, although pre-paid funerals presently account for only around two per cent of all funerals, about 250,000 people have purchased pre-paid plans. The business is presently worth around ,250 million. Up to 50,000 new plans are sold each year, to purchasers with an average age of 70 years, many of modest means.
There was little evidence of significant present risk to consumers, but there is concern that risk could increase in future as more schemes are offered and more people come to depend on them. In future, all pre-paid funeral plan providers will be regulated by the FSA unless they qualify for exemption if the scheme they offer meets stringent criteria.
4. On 29 July 1998 the then Economic Secretary, Patricia Hewitt, announced that pre-payments for funerals would be included in the scope of the Financial Services and Markets Bill but that the Treasury would consider exemptions for plans with sufficient other protection for savers.
5. On 14 January 1999, Ms Hewitt announced a consultation exercise to consider what exemptions would be appropriate (Treasury press release 7/99).
6. About forty responses were received to the consultation document, and the Treasury held meetings with industry representatives, funeral directors and consumers? representatives before reaching the decision announced by Melanie Johnson today.
FINANCIAL PROMOTION
The two draft orders detailing the financial promotions regime to be established under the Financial Services and Markets Act 2000 published for consultation today are:
- the draft Financial Promotion Order, which sets the scope of the restriction in the Act on the promotion of financial services by those not authorised by the FSA; and
- its equivalent for Collective Investment Schemes in respect of authorised persons.
Welcoming publication, Economic Secretary Melanie Johnson said :
?These provisions will apply however financial promotions are made to prospective purchasers. They will cover equally both the established print media and the developing media including the internet and interactive broadcast media.
?They will help start up and small business companies by reducing the cost of raising capital informally from so-called ?business angels? by exempting promotions aimed at encouraging them to invest in such businesses from FSA regulation.
?They will cover financial promotion in news and comment media as well as dedicated promotional channels. An exemption for journalism is proposed if journalists declare fully to readers the nature of any financial interest.
?They are a measure of our determination to ensure that regulation can meet new challenges without stifling innovation in rapidly modernising markets, where customers benefit from the new technologies and have increasingly higher expectations of the service they expect and the protection they deserve.?
BACKGROUND NOTE
The Financial Promotions Order (FPO) will be media-neutral and :
- apply to promotions through internet and interactive broadcasting as well as by personal visit, telephone call, letter, and newspaper, radio or television advertisement.
- replace previous concepts of advertisements and unsolicited calls with the single concept of communication of an invitation or inducement, which can be either in real or non-real time.
- provide an exemption for conduits, such as internet service providers, who have no control over the content of a communication.
Respondents should send comments on the draft orders by Wednesday 20 December to:
Tima Musa
Financial Services Regulation Team
HM Treasury
Allington Towers
19 Allington St
LONDON
SW1E 5EB
Tel: 020 7451 7611
The draft orders setting the scope of financial regulation under the Financial Sercices and Markets Act 2000 are :
- a draft Regulated Activities Order, which specifies the kinds of activity and investments which will be regulated if carried on by way of business;
- a draft Exemption Order, which lists the persons who will be exempt from regulation in relation to all activities or a specified class of activities;
- draft Appointed Representatives Regulations, which prescribe the scope of the exemption from authorisation for appointed representatives of authorised persons;
- a draft Non-Exempt Activities Order, which specifies the activities which a professional firm subject to the Part XX regime in the Act cannot perform without FSA authorisation; and
- a draft Business Order, which specifies the circumstances in which a person is, or is not, to be regarded as carrying on a regulated activity by way of business