A level playing field for financial services online?
Published: 15 Apr 2002 19:21 BST
The UK Treasury and the Financial Services Authority ("FSA") are inviting a further round of submissions on proposals for implementing the E-Commerce Directive (the "Directive") in respect of financial services. The proposed changes will result in amendments to the new financial promotions regime under the Financial Services and Markets Act 2000 ("FSMA") and also bring changes to the FSA Handbook. The new rules will affect all firms operating in the UK that provide financial services by electronic means, as well as providers in other EEA States providing such services into the UK. Interested parties, such as banks, building societies, insurance companies and underwriters, have until early May 2002 to respond to two consultations launched recently by the Treasury and by the FSA.
Background to the Directive
The Directive aims to remove potential restrictions on e-commerce throughout the European Economic Area (EEA) by applying the "country of origin" principle. In relation to financial services, it attempts to remove restrictions on the cross-border provision of financial services by electronic means. The country of origin principle means that, generally, in respect of "Information Society Services" ("ISS"), which for these purposes essentially means e-mail, mobile, interactive TV or web-based services, provided across borders within the EEA, the laws of the Member State in which the provider is established will apply. Except in certain circumstances, the provider need only comply with the local laws of its country of origin, irrespective of the Member State in which its services will be consumed. Effectively, this requires Member States to lift any domestic restrictions applied in respect of any incoming providers based elsewhere in the EEA.
The key issues
In December 2001, the Treasury invited submissions on its proposed approach to implementing the provisions of the Directive in respect of financial services. Essentially, the initial proposals reduced the number of exemptions or derogations for UK firms in respect of online promotions directed at other EEA States.
Concerns were raised that a different approach to implementation by other EEA States could be detrimental to UK businesses and consumers. In addition, initial reaction to the adoption of the "country of origin" principle ranged from fears that the proposals implemented the principle too strictly to those who believed that more stringent restrictions should be placed on businesses from non-UK Member States providing their services into the UK (particularly in respect of potential market abuse cases).
The Treasury's proposals
The Treasury proposes to apply the "country of origin" principle, leaving scope for derogations from this approach to apply in certain circumstances (i.e. to define activities which will not be subject to the "country of origin" principle, and reserve the UK regulators' powers in relation to them) so as to minimise the risk of market abuse. The general derogations relevant to financial services cover small e-money institutions (see for example by clicking here), insurance companies, advertising by operators of UCITS (undertakings for collective investment in transferable securities), unsolicited commercial communications by email and contractual obligations in consumer agreements.
In addition, case-by-case derogation allows each Member State to regulate the delivery of any service into such Member State on an individual basis provided that such measures are proportionate and necessary, or the service provider's behaviour is prejudicial within such Member State. Guidelines as to how such derogations may be made, and in what circumstances, are yet to be made available.
The Treasury takes the view that once properly implemented, the "country of origin" principle will benefit UK-established financial service providers. To this end, it is continuing efforts to ensure that the Directive and the derogations are implemented properly and interpreted consistently throughout the EEA.
Amendments to the FSMA
The consultation paper issued by the Treasury attaches three sets of draft regulations designed to achieve the following:
- lift restrictions on providers based elsewhere in the EEA when providing services via electronic means in to the UK.
- ensure that the restrictions placed on UK-based firms in respect of financial promotions under the FSMA also apply regardless of whether the communication is made domestically or to a person in another Member State.
- increase the powers of the FSA to apply rules to financial service providers in other Member States providing services into the UK, where such provider falls into one of the derogations from the "country of origin" principle.
The FSA's proposals
The FSA proposes to apply the "country of origin" principle by amending the FSA Handbook. It attempts to tackle the risk of foreign firms subject to less stringent regimes gaining a competitive advantage over UK firms by promoting consumers' awareness of the implications and risks of obtaining services from abroad.
The FSA uses the term "Electronic Commerce Activity" ("ECA") to describe an ISS provider delivering financial services. The proposed amendments to the FSA Handbook relate to disclosure, to UK-based firms conducting ECA in other Member States and the removal of requirements in respect of firms from other Member States conducting ECA in the UK.
New information requirements: under the FSA proposals, a provider of financial services based in the UK will be required to provide, in respect of any ECA undertaken whether within the EEA or domestically, full disclosure of such information such as its name, address, its regulator and VAT number.
Impact for UK firms: financial promotion requirements will be applied in full to businesses operating in the UK which are conducting ECA into another Member State and provisions that distinguish between UK customers and other EEA customers will be removed. This is designed to ensure that all EEA customers are treated equally by UK firms conducting ECA in the EEA.
Impact for non-UK firms: by implementing the country of origin principle, as mentioned above, financial service providers conducting ECA from another Member State into the UK will no longer be required to comply with the FSA's business rules or be authorised under the FSA regime (unless a derogation applies) and so such provisions will be removed.
Practical impact of the new rules
If the proposals are adopted, UK-based financial service providers may face additional costs when providing services out of the UK to another Member State by having to comply with the UK regime (which may require higher standards of consumer protection). On the plus side, the Treasury believes that any additional costs will be offset by cost savings in not having to comply with regimes in several different jurisdictions. The greater the number of EEA countries to which a firm provides its services, the greater the cost savings.
However, there is one caveat: unless the general exclusions and other derogations are interpreted consistently throughout the EEA, UK-based firms could find that they are treated differently in differing Member States after all.
Next steps
The consultation on the Treasury's proposals runs until 2 May 2002, and the FSA's consultation ends on 10 May 2002. The Treasury's consultation focuses on the draft statutory instruments, but also invites comments to enable it to assess the benefits and compliance costs for financial service businesses and consumers.
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