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Session 2001- 02
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Delegated Legislation Committee Debates

Draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (Electronic Commerce Directive) Order 2002

Second Standing Committee

on Delegated Legislation

Wednesday 12 June 2002

[Mr. David Chidgey in the Chair]

Draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (Electronic Commerce Directive) Order 2002

4.30 pm

The Financial Secretary to the Treasury (Ruth Kelly): I beg to move,

    That the Committee has considered the draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (Electronic Commerce Directive) Order 2002.

I am looking forward to serving under your able chairmanship, Mr. Chidgey. The primary aim of the order is to amend the territorial scope of the United Kingdom's financial promotion regimes in line with the requirements of the European directive on e-commerce. Both during consideration of the Bill that became the Financial Services and Markets Act 2000 and during the debate on the draft financial promotion order last year, the Government made it clear that those changes would be required as part of the UK's implementation of the directive. As well as changing their territorial scope, the order amends the financial promotion regimes as they apply to certain intermediary service providers—ISPs—who act as mere conduits, or otherwise cache or host information as defined by the directive.

Before turning to the detail of the draft order, it may be useful if I outline the main objectives of the e-commerce directive. It is aimed at what are known as information society services, as well as those who provide, purchase or otherwise make use of those services. Broadly speaking, information society services—ISS—are services provided for remuneration at a distance by electronic means and at the individual request of the recipient. In the main, such services are provided over the internet. The directive is therefore of most interest to those who provide or purchase services online.

The directive is designed to improve the functioning of the internal market both by removing barriers to the free movement of information society services between European Economic Area member states and by improving the level of legal certainty surrounding the provision of such services. The heart of the legal framework provided by the directive is article 3, known as the internal market clause. Under article 3(1), member states must ensure that information society services provided by persons established on their territories comply with the national legal requirements that apply to those services, regardless of where in the EEA the services are being provided. Under article 3(2), member states are prohibited from restricting the freedom to provide information society services by persons established in other member states.

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However, there are exceptions. Article 3(3) removes certain fields from the application of article 3(1) and (2). They include the advertising of their units by undertakings for collective investment in transferable securities—UCITS—some requirements in the life and general insurance directives and contractual obligations concerning consumer contracts. In addition, under article 3(4), member states can take measures against given incoming information society services on a case-by-case basis on grounds of public policy, public security, public health and for the protection of consumers, including investors.

It is also worth noting that the directive applies only in those areas that fall within what is termed its co-ordinated field. That is made up of the legal requirements that apply to information society services or the providers of information society services, regardless of whether those requirements are of a general nature or are designed specifically for such services or providers.

The draft order amends both the general financial promotion regime and the regime governing the promotion of collective investment schemes. Last year, when discussing the draft Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, the then Economic Secretary made it clear that the Government would

    ''seek the House's approval of legislation to implement a home state regime as and when that is developed''

and would

    ''as is necessary, seek approval to amend''—[Official Report, Second Standing Committee on Delegated Legislation, 26 March 2001; c. 5.]

the financial promotion regimes to implement the e-commerce directive this year.

For financial promotions that constitute information society services, the draft order will place the financial promotion regimes on a country of origin basis in accordance with article 3 of the directive. That means that communications constituting information society services made from establishments in the UK to persons in other EEA states will become subject to the UK financial promotion regimes. That is achieved by articles 4 and 9 of the draft order, which disapply the existing exemptions for communications constituting information society services made or directed to persons in other EEA states.

Likewise, communications constituting information society services made to persons in the UK from establishments in other EEA states are exempted from the UK financial promotion regimes by articles 6 and 10 of the draft order. Article 6 is qualified to reflect article 3(3) of the directive. In particular, it does not apply to the advertising of its units by a UCITS scheme.

In addition to changing the territorial scope of the financial promotion regimes, the draft order also amends the existing exemption for mere conduits of information and introduces a new exemption for those who cache or host information. Those changes bring the financial promotion regimes into line with articles 12 to 14 of the directive.

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It is worth emphasising that all the changes to the United Kingdom's financial promotion regimes are limited to promotions that constitute information society services. They do not apply to promotions that are not covered by the directive. Although the changes are limited to information society services and their providers, the Government remain strongly committed to the country of origin approach to the achievement of a single European market in financial services, regardless of the medium through which they are provided. We believe that that can best be achieved through the mutual recognition of different national regulatory standards supplemented by the harmonisation of core standards of consumer protection at European level—as provided, for example, by the forthcoming directive on the distance marketing of financial services.

We are continuing to push that agenda with our European partners, and the Government will seek the House's approval of legislation implementing a country of origin approach as it is introduced at European level. In the meantime, we will continue to manage the transition to the county of origin approach in a way that is consistent with our EU obligations, continues to provide core standards of protection for UK customers and minimises the risk of dual regulation of UK businesses.

Finally, I can confirm that, in my view, the provisions of the order are compatible with the convention rights within the meaning of the Human Rights Act 1998. I am pleased to commend it to the Committee.

4.37 pm

Mr. Howard Flight (Arundel and South Downs): I welcome you to the Chair, Mr. Chidgey.

In the Committee stage of the Financial Services and Markets Act 2000, 47 pages of discussion were recorded about the promotion order, which explored the whole territory of e-commerce. This order is, as stated, essentially technical, and implements the electronic commerce directive of 8 June 2000. For clarification, we would like to record that things may have gone too far in some territories. In the main, however, there is nothing to object to in principle.

The order appears to remove some of the protections provided by section 21 or section 238 of the Financial Services and Markets Act 2000, and it is not entirely clear whether the directive requires that—it is hard luck if it does. Another effect of the draft order is to remove the non-UK recipients exemption in article 12 of the financial promotion order and article 8 of the collective investment schemes order from electronic commerce communications to recipients outside the UK, and conversely, to grant an additional exemption to electronic commerce communications made from other member states. Again, it is unclear whether the directive required that. If so, so be it.

Going through the order in sequence, article 3(1) inserts a new paragraph (f) in article 6, and contains a definition of ''electronic commerce communications'' that refers to an information society service. In turn, the directive refers to a definition in an earlier directive,

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and perhaps that should have been defined in the order. The explanatory notes prepared by the Treasury refer to that, and the reference is somewhat obscure. It should, in particular, be made clear that communication by fax or telephone falls outside the definition, as is stated in annexe 5 of the directive.

Article 3(1) inserts new paragraphs into article 6 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The new paragraphs define an ''incoming electronic commerce communication'', which is to be exempted from the financial promotion restriction. The definition includes any such communication made

    ''from an establishment in an EEA State other than the United Kingdom''.

That is where we have a problem with the draft order. The definition should surely be restricted to cases in which the communication is made to a person in the UK, or better still to a person in another EEA state. The definition is relevant to the disapplication of the financial promotion restriction under proposed new article 20B(1). We question whether that is required by the directive if the recipient is outside the EEA. I shall revert to that point later.

If the definition was restricted to cases in which the communication was made to a person in the UK, or a person in another EEA state, that would reflect the wording of the Treasury's explanatory memorandum, which says in 4(ii) on page 3 that the draft order exempts only communications

    ''made to persons in the UK'',

and I am not sure whether people will notice that the final draft of the order goes rather wider than that advice.

Article 3(2) inserts new article 8A. The extension of various definitions in the financial promotion order to include Communitywide equivalents does not seem to be required by the directive but seems perfectly sensible. Article 4 provides that the exemption for communications made to recipients outside the UK should

    ''not apply to an outgoing electronic commerce communication.''

That seems to implement the directive properly. To avoid possible confusion, we ask that the provision should refer to article 12(1)(a) only, so that it is clear, as seems to be intended, that it does not apply to communications that are directed at persons outside the UK. Those are communications sent through the mass media, including those sent electronically, but are not personally addressed to anyone, and so are not sent at their request; those would fall outside the definition of ''information society services'' and the exemption for them should not be excluded by the order.

Article 6 will insert new article 20B. The new provision will disapply the financial promotion restriction from incoming electronic commerce communications. That means that as long as the communication is from an EEA state other than the UK, it is not relevant where the recipient is. The financial promotion restriction should continue to apply if the recipient is outside the UK, or at least outside the EEA.

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The directive provides that member states may not restrict the freedom to provide qualifying information society services from another member state, but it is clear that the prohibition refers only to the freedom to provide such services to that member state, or at least into another member state, subject to the prohibition. Perhaps it would have been better to implement the directive properly, so that it referred to communications to any member state.

The recitals to the directive include many references to the fact that it applies only to the free movement of information society services within the internal market. Recital 8 states that the objective is to create a legal framework to ensure the free movement of information society services between member states. Recital 10 provides that the measures provided for in the directive are limited to the minimum necessary to achieve the objective of the proper functioning of the internal market. Recital 22 refers to the necessity for a competent authority in a member state to provide protection in relation to information society services not only for the citizens of its own country but for all Community citizens.

The directive does not seem to protect recipients outside the EEA. Indeed, article 3, which is the provision requiring free access, is headed ''Internal Market''. It seems to require the removal of regulation only from communications into the UK or another EEA state. There is no need to disapply the financial promotion restriction from communications made to countries outside the EEA. The definition of incoming electronic commerce communication in new paragraph (g) to article 6 should not apply to recipients in them. To apply them unnecessarily removes protection from electronic commerce communications made from a non-UK EEA state into countries outside the EEA. The Minister will recollect that the Financial Services and Markets Act 2000 applies the financial promotion restrictions to them in particular circumstances, and it should perhaps continue to do so.

Article 6—proposed new article 20B—provides that an unsolicited communication will continue to be subject to the financial promotion restriction, which seems fine. It defines when a communication is unsolicited. It is unsolicited unless there was an express request from the prospective recipient. Although that definition repeats the wording in the directive, might it also be appropriate to repeat the extension of ''unsolicited'' in article 8(3)(a) of the financial promotion order? That would make it clear that the request must be for the particular communication sent, and would ensure consistency with the meaning of ''unsolicited'' in the rest of the FPO.

Does the Minister believe that the restriction of ''solicited'' in article 8(3)(b) should be repeated? It provides that a communication during a visit or conversation is not solicited unless it was anticipated at the beginning of that visit or conversation. That

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does not allow for requests made during the visit or conversation to discuss a different communication and is rather draconian, even for the FPO.

Part 3 repeats the collective investment schemes order, and we have no particular comments to make about it. Regrettably, we feel that the home country regulation of electronic commerce communication is required by the directive in relation to all such communications to other EEA states. That seems to mean that all exemptions that are not limited to recipients in the UK might have to be disapplied in relation to outgoing electronic commerce communications, not only article 12. Have the Government considered that interpretation?

I put those technical matters on record. Generally, as was stated at the beginning, it is a technical document, and there are certainly no party politics in it. The intention is to promote the internal market and the financial services industry in the UK. Broadly speaking, we have none of the problems in relation to the European electronic commerce directive that we thought might have arisen when the Financial Services and Markets Bill was in Committee.

4.49 pm


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