The Law Relating to Financial Services

'This new law [the Financial Services and Markets Act 2000], the financial crime objective and the relevant statutory powers, will make the Financial Services Authority's role in relation to the prevention of money laundering different from that of its various predecessor regulatory bodies under the Financial Service Act 1986. ' The UK's financial sector has been a troubled and puzzling conundrum for many governments in the aspect of regulation and the prevention of financial crime. In the early 1980's the financial sector was split into 3 main sectors, banking, insurance and investment.

Gradually through the decades the financial sector has started to lose its boundaries and therefore has called for a review which has been adhered through many acts of legislation ending in the current topic, the Financial Services and Markets Act 2000 (FSMA). There have been many theories as to how the financial sector should be regulated, from self-regulation to statutory regulation, with examples coming from the USA and the Scandinavian countries. After two failed attempts to stop mal-practice in the UK's financial market in 1693 and 1696, an act to restrain the number and ill practice of brokers and stock jobbers was enacted in 1697.

This act outlawed stockbroking in regard to virtually all financial instruments and share of corporations unless licensed to do so by the Court of Alderman of the City of London. However this didn't last past the 1980's which saw an absence of statutory regulation for the rapidly growing financial sector in two sectors of the three that constituted the UK's financial market. Most regulation of the financial market was done through reactionary statutes rather than precautionary. For example when the failure of Albert Life Assurance Co. 1869 was closely followed by the Life Assurance Companies Act 1870.

The same was also seen in the investment sector where a number of share-pushing scandals were unearthed and followed by the Prevention of Fraud (Investments) Act 1939. Despite the fact that the UK had not followed the US in using its statutory powers to regulate the financial market, the approach of self-regulation had worked within reason with the addition of the guidelines set by various acts of parliament. The first form of formal authority or supervisory organisation came from the Prevention of Fraud (Investments) Act 1939 which prohibited dealings in securities unless licensed by the Department of Trade and Industry (DTI).

This was followed by the Banking Act 1979 since the repeal of the Banking Act 1844. Although there was power given to the Bank of England issued from the Bank of England Act 1946 to issue directives to the banking sector, although this power was never executed. Instead there was moral persuasion and self-regulation based on the Bank of England's statutory power to manipulate the UK's financial market. The Bank of England's Discount Office, which had several characteristics, which developed to create the banks approach to statutory regulation, did the monitoring of the banking sector.

The approach was informal and flexible, unlike what was created in the USA, and wasn't based on statute or examinations but rather through casual interviews. This was termed as non-statutory rather than self-regulatory. The Prevention of Fraud (Investments) Act was re-legislated in 1959 although this too had problems dealing with the financial market; as seen in the case of Hughes and Others v Asset Manager Plc1. In this case an agent bought shares on behalf of the principle but made a loss of i??

1 million, the agent was unlicensed at the time and the principle tried to claim that therefore the contract was void. The courts ruled that the act prohibited the agent making such a contract but did not express or imply that the contract should be made void. Self-regulation was to be threatened through its own failure in the late 1970's with crisis such as the secondary banking sector failure 1973-75. The secondary banking companies didn't require a licence to trade under the Companies Act 1967 and furthermore were not subject to supervision of the Bank of England or the Department of Trade and Industry (DTI).

In this crisis the property sector was booming but when the theoretical bubble burst the secondary banking industry failed to meet the demands of its repayment obligations. The consequence of this crisis was the Banking Act 1979 which preserved the relationship between the Bank of England and the primary banking sector but created a supervisory role within the secondary banking sector. Regretfully this act didn't have the required impact as was replaced by the Banking Act 1987, which replaced the two-tier banking system with a single banking authorisation.

Included within the act was further information gathering powers for the Bank of England. The boundaries of the financial sector were first starting to erode in the early 1980's with many business organisation operating in more than one sector. Whilst this was happening, there was a policy lean towards self-regulation in each sector. The result of this was an "Informal and extra legal system of financial regulation giving way to one largely based on statute. "2 This was the height of self-regulation for the financial sector and the supervisory role of the Bank of England.

The financial market favoured the approach as it allowed so much freedom and didn't involve costs but showed the public that there was a form of regulation in order to gain market confidence. However, the self-regulating organisations (SRO's) were of so many and wide spread over the sectors of the financial market that there was confusion as to what ends each SRO should concentrate their means. The problem needed another piece of legislation which came in the form of the Financial Services Act 1986 (FSA).

The FSA created the Securities and Investment Board (SIB) which was specifically designed to oversee the work of the numerous SRO's. The SIB was a private company and therefore was limited by guarantee but it exercised many powers transferred to it from the DTI. The main aim for the SIB was to ensure that the SRO's were regulating in a way that was aimed in the interest of the general public. There was much criticism of the FSA 1986 with people comparing it with the statutory regulator of the USA, the Securities and Exchange Commission (SEC), which was against the self-regulation that the UK's financial organisations so adored.