Financial Services (Hansard, 22 July 1987)

§ Mr. Lilley

Under section 43 of the Financial Services Act the Treasury has responsibility for approving the conditions that the Bank of England intends imposing for admission to its list of exempted persons and the arrangements for a person's admission to and removal from it. Draft conditions and arrangements were set out in a consultative document jointly issued by the Treasury and the Bank of England in December 1986. ("The future regulation of the wholesale markets in sterling, foreign exchange and bullion"). Following revisions in the light of comments received, the Treasury has now approved the following conditions and arrangementsAn applicant will need to satisfy the Bank that it is 'fit and proper', by reason of its capital, managerial and operational resources, its standards of business conduct and its high reputation and standing, to undertake the particular activity and also that it acts on a regular basis as a market maker or broker in one or more of the wholesale market instruments. In determining whether an applicant meets these conditions, the Bank will take into account the following factors:

(a) that the financial position of the applicant is sound;
(b) that its ownership structure does not result in any unacceptable conflicts of interest, nor is in any other way a source of potential weakness;
(c) that its management and staff are of high quality and appropriate experience and that its systems are effective;
(d) that its reputation in the market place is good;
(e) that it is able and willing to adhere to an undertaking to observe the London Code of Conduct, as specified by the Bank of England from time to time;
(f) that it acts as a market maker or broker in one or more of the wholesale market instruments. In those markets where prices arc quoted continuously, the term market maker will be taken to mean an institution which, as principal, holds itself out generally and continuously as willing to make a price in the relevant instrument. In less continuous markets (eg in bullion, swaps or options), the Bank will wish to include those institutions who are generally willing to make a price in the relevant instrument. But, unlike for example in the gilt-edged market, there is no absolute commitment or obligation on market makers in the wholesale markets to make prices regardless of market conditions; the Bank is concerned with those institutions whose function is normally to do so."

A firm applying for inclusion on the list will be required to submit a business plan setting out the type or types of activity it intends to undertake, including types of instrument (and currencies) in which it intends to trade. Its 234W permitted scope will be limited to those activities agreed with the Bank, subject to review. Applicants should supply any information requested by the Bank which the Bank reasonably requires to form its view on the application.

Applications should in any event, unless explicitly agreed with the Bank, include the business plan described above, a description of the applicant's organisation and staff resources, details of ownership, information on directors and managers, and details of internal control systems. Where appropriate, applicants should specify which of their operations are already supervised, and by whom.

The Bank will also require the applicant's latest audited accounts. Where it would fall to the Bank to assess an applicant's capital adequacy, the applicant will be asked for any additional information necessary to demonstrate its financial soundness.

The Bank will aim to give its decision within three months of receiving an application. Where the Bank is minded to reject an application, it will give the applicant notice of that fact and specify its reasons. The Bank will allow the applicant reasonable opportunity to make representations and will consider any representations made before coming to a decision.

Once established on the list, an institution will need to continue to satisfy the Bank that it should remain listed.

The Bank will give notice to any listed institution which it considers should no longer be included on the list that it may be removed from the list. The Bank will give its reasons for taking that view. The institution will be given reasonable opportunity to make representations as to why it should not be removed from the list and, where relevant, to take remedial action, before the Bank comes to a decision.

Where the Bank, having considered the representations of an applicant whose application it is minded to reject or an institution it is minded to remove from the list, remains of the view that the application should he rejected or the institution removed, it will specify its reasons for rejecting these representations. The applicant or the institution may have the matter reviewed by a suitable independent person(s) appointed by the Bank for that purpose, such as a member of the panel established under section 96 of the Financial Services Act. In addition to considering and reporting on the substantive issues, the person(s) conducting the review will decide who should pay the costs of review. There will normally be a presumption that where the Bank's decision is supported, these costs will be borne by the applicant or institution. The Bank will require a prior written undertaking from the applicant or institution concerned to pay such costs, if any, as are awarded against it.

Later this week the Bank of England will publish a paper setting out in detail how it intends to supervise these markets, a copy of which will be placed in the Library of the House.