ENF 16.2 Authorised unit trust schemes

Sections 242 to 261 of the Act contain provisions relating to AUTs. These include the following enforcement powers:

1. (1)

   a power for the FSA to revoke authorisation of an AUT otherwise than by consent (section 254);

2. (2)

   a power for the FSA to give directions (section 257); and

3. (3)

   a power for the FSA to apply to court for the removal of a manager or trustee or the winding up of an AUT (section 258).

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.

1. (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. (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:

   1. (a)

      one or more of the requirements for the making of the order are no longer satisfied;

   2. (b)

      the manager or trustee of the scheme concerned has contravened a requirement imposed on him by or under this Act;

   3. (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;

   4. (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

   5. (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'.

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'.

1. (1)

   Section 257(1) (Directions) contains a power for the FSA to give directions to the manager and trustee of an AUT.

2. (2)

   Section 257(1) states that 'The FSA may give a direction under this section if it appears to the FSA that:

   1. (a)

      one or more of the requirements for the making of an authorisation order are no longer satisfied;

   2. (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;

   3. (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

   4. (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'.

1. (1)

   The types of directions the FSA may give under section 257 are explained in section 257(2).

2. (2)

   Section 257(2) states that 'A direction under this section may:

   1. (a)

      require the manager of the scheme to cease the issue or redemption, or both the issue and redemption, of units under the scheme;

   2. (b)

      require the manager and trustee of the scheme to wind it up'.

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'.

1. (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:

   1. (a)

      removing the manager or the trustee, or both the manager and the trustee, of the scheme; and

   2. (b)

      replacing the person or persons removed with a suitable person or persons nominated by the FSA'.

2. (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)).

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:

1. (1)

   removing the manager or the trustee, or both the manager and the trustee, of the scheme; and

2. (2)

   appointing an authorised person to wind up the scheme'.

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. (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:

   1. (a)

      the extent to which the breach was deliberate or reckless;

   2. (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;

   3. (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;

   4. (d)

      whether there are grounds for believing a breach is likely to be continued or repeated;

   5. (e)

      the length of time over which the breach happened; and

   6. (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. (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. (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:

   1. (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

   2. (b)

      the property subject to the scheme cannot be valued accurately.

4. (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. (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. (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. (7)

   The conduct of the manager or trustee in relation to, and following the identification of, the issue, for example:

   1. (a)

      whether the manager or trustee discovered the issue or problem affecting the AUT and brought it to the FSA's attention promptly;

   2. (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;

   3. (c)

      whether the manager or trustee has compensated past and existing participants who have suffered loss.

8. (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. (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.

The FSA may use its powers under sections 254, 257 and 258 individually, together, and as well as direct enforcement action against a trustee or manager in their capacity as firms.

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).

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. (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. (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.

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).