Implementation of the E-Commerce Directive in Financial Services: A Response to Consultation
Introduction
1. The Government has consulted twice on its proposals for implementation of the E-Commerce Directive (?ECD?) in those areas of financial services regulated under the Financial Services and Markets Act 2000. The Treasury wishes to thank all those who have taken part in these consultations. A list of respondents is included in Annex A of this document.
2. This response document expands upon the initial response published as Part 1 of the second consultation document in March. The Department of Trade and Industry will be issuing a separate document in response to comments received on its proposals for implementation in other areas.
Summary
3. The responses have confirmed the Treasury in its view that the approach outlined in the first consultation document issued in December is correct. However, we have amended our proposals in a few areas, most notably in relation to the liability of intermediary service providers (?ISPs?) who ?cache?, ?host? or act as ?mere conduits? of information under the UK's financial promotion regime. We have also listened to concerns about the possible effects of implementation in other EEA member states on both UK business and UK consumers, and are working with our European partners to ensure that the Directive is fully and properly implemented for financial services throughout the EEA.
Achieving a Single Market in Financial Services
4. The Government is strongly committed to the ?country of origin? approach to achieving a single European market in financial services. We believe that this can best be achieved on the basis of mutual recognition of established procedures and practices in different EEA states combined with core standards of protection and access to redress mechanisms for EEA consumers.
5. The completion of the single European market in financial services and the move to a country of origin regulatory approach throughout the EEA provide major opportunities for the UK's financial services sector. However, the Government is aware that the current transition period requires careful handling. We have to make sure that we act in accordance with our European obligations, but in a way that continues to provide core standards of protection to UK consumers, and minimises the possibility of dual regulation on UK business. Striking the right balance is vital and underpins our approach to implementing the ECD.
Responses to Consultation
6. Respondents to both consultations broadly welcomed the Government's proposals for implementation of the ECD in areas regulated under the Financial Services and Markets Act 2000, although some raised general concerns and specific technical points in certain areas. These are:
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The effect of implementation by other EEA Member States on UK business and UK consumers
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That our proposals apply the country of origin principle either too extensively or too narrowly, especially in relation to the UK's market abuse regime
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That our proposals either fail to provide adequate protection to UK consumers or provide too much protection to UK consumers
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Implementation of Articles 12 ?14 of the Directive on the liability of intermediaries
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The definition of ?consumer?
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The article 3(3) UCITS exclusion
Implementation by Other EEA Member States
7. This remains the area of greatest concern for respondents. Some are concerned that the ECD fails to provide sufficient safeguards to deal with incoming information society service (?ISS?) providers who are established in EEA states with less stringent financial regulation than the UK and that this could lead to such providers having a competitive advantage over UK established firms. Unharmonised funds are cited by a number of respondents as an area of particular concern. Some are concerned that UK established financial service firms could face dual conduct of business regulation unless the Article 3(3) exclusions and the Article 3(4) ?case-by-case? derogation are interpreted consistently throughout the EEA. Here, the Article 3(3) exclusion for the advertising of their units by Undertakings for Collective Investment in Transferable Securities (?UCITS?) is the main concern. Some are concerned that the ECD fails to provide adequate safeguards for UK consumers purchasing financial services on-line from firms established in other EEA Member States with lower standards of consumer protection than the UK.
8. As we noted in our initial response document published in March, the Government fully understand these concerns. We are actively engaged at a European level to ensure that the ECD is fully and properly implemented by other Member States and that the UK's financial services sector benefits fully from ?country of origin? regulation. In relation to concern over both the promotion or sale of unharmonised funds in the UK and levels of protection for UK consumers, our policy on the consumer contracts exclusion means that incoming ISS providers will have to provide core standards of information to UK consumers to the level provided by the forthcoming Directive on the Distance Marketing of Financial Services (?DMD?). In addition, our regulations, in accordance with the Directive, allow the Financial Services Authority (?FSA?) the full use of the Article 3(4), ?case-by-case? derogation against specific services provided by specific incoming providers. In relation to the advertising of their units by UCITS schemes, the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (Electronic Commerce Directive) Order 2002 gives the FSA the power to use the article 3(3) UCITS exclusion although we understand that, for the time being, the FSA has chosen not to do so.
Country of Origin
9. It remains the case that of those who raised the issue, respondents divide approximately evenly between those who believe our proposals implement the scope of the country of origin regulation appropriately, those who are concerned that, in general, our proposals implement country of origin too strictly, and those who believe our proposals should have placed greater limits on the application of the UK's financial services regulatory regime to incoming ISS and ISS providers. The latter group are primarily concerned about two issues: market abuse and the consumer contract exclusion.
10. As we noted in our initial response to consultation, the discussions on the proposed Directive on Insider Dealing and Market Manipulation (market abuse) have confirmed the policy that EEA member states should be able to take action to protect the integrity of markets situated or operating within their territories. This approach will supersede the country of origin approach of the ECD.
Protection of Consumers
11. For the full potential of the single market in financial services to be reached, consumers need to be both confident about the contractual arrangements that apply to their transactions, and have access to core information that will aid them in their purchasing decisions. Consumers need to feel safe when they purchase financial services on-line.
12. This is currently being addressed at a European level, both through the forthcoming DMD and through the development of Fin-Net, the EU-wide network of financial services ombudsmen and redress schemes.
13. As part of our approach to handling the current transition period to the achievement of the single European market in financial services, the Electronic Commerce Directive (Financial Services and Markets) Regulations 2002 give the FSA power to make use of the exclusion for consumer contracts to apply rules to incoming ISS and ISS providers but only on a strictly limited and temporary basis. This power is ring-fenced to the core standards contained in the DMD and incoming ISS providers will only need to comply with FSA rules if they do not already comply with equivalent provisions in their country of origin. Even though the final text of the DMD is neutral on the ?country of origin? issue, respondents should be aware that, as stated in the December consultation document, the Government still fully intends to remove the FSA's ability to make use of this power as part of its implementation of the DMD.
Liability of Intermediaries
14. We agree with those respondents who argue that the ?principal purpose? test for ?mere conduits? contained in the Financial Promotion Order is incompatible with Article 12 of the Directive and have amended the UK's financial promotion regime accordingly. We have also amended the exemption from the financial promotion restriction for those who act as ?mere conduits? or otherwise ?cache? or ?host? information so that their exemption from liability reflects the position in Articles 12 ?14 of the Directive.
Definition of Consumer
15. A few respondents suggested we amend the definition of ?consumer? to exclude individuals who have been classified under existing legislative or regulatory requirements as ?professionals?, ?experts?, or ?intermediate customers?.
16. We do not believe that we have flexibility here. Our definition of ?consumer? has to follow the Directive in defining consumers as natural persons acting for purposes other than their trade, business, or profession. This is a standard European definition. The same definition is used, for example, in the DMD. There is at present no single concept of ?consumer? that applies in all financial services contexts (e.g. there are categories of persons in the Financial Promotion Orders who may be ?consumers? within section 138 of FSMA, but who are exempted from the financial promotion regimes). We do not think that a single concept is necessarily appropriate in all situations; and in any event, we do not have the power to introduce one consistently with our European obligations.
UCITS Exclusion
17. As already noted, the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (Electronic Commerce Directive) Order 2002 gives the FSA power to make use of the exclusion for the advertising of their units by UCITS. We understand that they have chosen not to do so. As respondents recognise, the exclusion raises a number of difficult issues. It applies only to advertising but not to marketing requirements. It also only applies to UCITS themselves and not to intermediaries. We are, of course, concerned if UK established providers find that they face dual regulation. We are continuing efforts at a European level to ensure that UK established UCITS are not restricted from launching promotions into other member states by the rules of those states.
Annex A: List of Respondents
Abbey National Group
ABN AMRO Bank N.V.
Advertising Association
Allen & Overy
Association of British Insurers
Association for Payment Clearing Systems
Association of Unit Trusts and Investment Funds
Barclays
Bloomberg
Building Society Association
Cable & Wireless plc
Consignia
Consumers? Association
Council of Mortgage Lenders
Faculty of Advocates
Financial Services Consumer Panel
Financial Services (Europe) Ltd
HBOS plc
ILAG
Internet Services Providers Association
Investment Management Association
Legal And General Assurance Society Ltd
London Investment Banking Association
London Law Society
National Computing Centre Ltd
National Consumer Council
Reuters
Shepherd & Wedderburn
Thus plc
Travers Smith Braithwaite
Yahoo! Europe