Select Committee on European Union Minutes of Evidence


  13.  The European Union has a significant role to play in establishing a safe environment in which e-commerce can flourish, not least because of its legislative role. EC Directives and regulations, and decisions of the European Court of Justice, can facilitate or discourage e-commerce and can increase or reduce the costs of providing cross-border services. Decisions by these EU institutions are important for three reasons: first, they establish major elements of the legal framework within which Europe's financial businesses operate; second, they lay down rules for the cross-border provision of services within the EU; and, third, they may provide for common technical standards and standards of consumer protection.

  14.  There is currently considerable legislative activity in the European Union which is relevant to e-commerce. This includes:

    —  The Electronic Signatures Directive.  This stipulates that an electronic signature cannot be legally discriminated against solely on the grounds that it is in electronic form and provides that it can be used as evidence in legal proceedings.

    —  The E-Money Directives.  These allow enterprises issuing electronic money, but which do not wish to undertake the full range of banking operations, to enjoy the benefits of being able to operate throughout the Single Market on the basis of authorisation in one Member State.

    —  The draft E-Commerce Directive.  This applies to all business, not just financial services firms. It requires Member States to ensure that contracts can be entered into by electronic means and seeks to prevent them from imposing their own "e-commerce" requirements on business being done from another Member State.

    —  The draft Distance Marketing Directive. The current draft lays down disclosure requirements that would apply to the distance marketing of financial products and services.


  15.  The FSA's comments on the particular issues raised by the Committee are confined to our specific areas of responsibility.

Question 1: What needs to be done to create confidence and to stimulate e-commerce?

  16.  Confidence in e-commerce will in the FSA's view be assisted by the factors outlined in paragraph 13 above. It is important to distinguish between the business-to-business market (currently by far the largest component of e-commerce) and the business-to-consumer market.

  17.  Within the business-to-consumer market, the question of confidence falls into two categories. The first is technology-related. (Does the system work? Is it safe? Can my messages, including payment instructions, be intercepted or hacked into?) The second covers the global nature of the Internet. (Does this financial services firm in Seville, Palermo, Lyons exist? How can I check? What happens if things go wrong?)

  18.  As regards technology, two kinds of question are likely to be of particular concern to consumers. First, is it safe to send money across the Internet? Through its consumer awareness work, the FSA will explain the relative risks involved in using the Internet as opposed to other money transmission systems (post, phone, fax). The Committee will be aware that other public bodies also have a role to play. Second, can my details, including credit or debit card details, be hacked into on an authorised firm's computer? As noted above, the FSA's scrutiny of firms' systems and controls addresses this issue.

  Before deciding whether to seek financial services over the Internet, the following issues are likely to be particularly relevant to the consumer:

    —  Can I check whether a financial services firm is authorised? The FSA's Central Register contains details of all firms authorised to do financial services business in the UK. It can be accessed online or by telephone.

    —  Is there an ombudsman scheme? The UK financial services industry operates ombudsman and arbitration schemes. When the Financial Services and \Markets Bill comes into operation there will be a single ombudsman scheme. There is currently no EU requirement on Member States to establish an ombudsman scheme, though the Commission is exploring the issue.

    —  If the firm is unable to meet its liabilities, is there a compensation safety net? There is a compensation safety net for depositors, investors and policyholders. Within the EU the Investors Compensation Directive requires Member States to provide for minimum levels of compensation in the event that an authorised firm defaults.

Question 2: Does the European Commission's draft Action Plan "e-Europe: An Information Society for All" offer a realistic means of promoting e-commerce in the EU?

  20.  The Commission's draft Action Plan makes three points that are particularly relevant to e-commerce: first, the importance of systems for consumer redress; second, the benefits of developing smart cards, an electronic signature infrastructure, and common technical standards for payment systems; and, third, the availability of risk capital for hi-tech small and medium sized enterprises.

  21.  The FSA also welcomes the initiative launched in the Commission's Financial Services Action Plan for a Green Paper/Communication on e-commerce and financial services, which we think will prove a useful vehicle to consider any further work that may be needed to address outstanding issues and to ensure that there are no conflicts, duplications or gaps.

Question 3: Will codes of conduct and co-regulation provide sufficient protection? Is there a case for intervention by national governments and the EU?

  22.  In announcing its decision in 1997 to reform financial regulation in the UK, the Government took the view that the earlier system, with strong elements of self-regulation, had failed to provide the required levels of consumer protection. The FSA believes that it is important for the regulator of such a key sector as financial services to have express statutory backing and adequate powers of enforcement. As the same time it strongly believes in keeping in close touch with the regulated industry and, as far as possible, regulating with the grain of the market.

  23.  In the FSA's view, codes of conduct have their place; they can galvanise industry support for raising standards across an industry. However, in so far as such codes are not enforceable, the FSA does not see them as a substitute for regulatory requirements. Furthermore, codes are not necessarily easily exportable cross-border, and are not understood, and may be distrusted, in jurisdictions where they are uncommon.

Question 4: Do the institutions of national governments, on the one hand, and the European Commission, the Council of Ministers and the European Parliament, on the other, function with sufficient flexibility and coherence to promote the EU's objectives in the field of e-commerce?

  24.  The FSA is concerned that the length of time involved in overhauling the EU legislative framework might mean that even new provisions of setting standards could well be out of date by the time they are enacted. The FSA believes that it should be possible for EU institutions to meet the challenge of speed, transparency and democratic input by the use of so-called framework directives. These could enable regulators to fill out the detail, and change it when necessary, in a process which is itself transparent and open to challenge. Efficient use of comitology would help, as would the use of experts at the service of the Commission and the European Parliament.

12 April 2000

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