Select Committee on European Union Minutes of Evidence

Further supplementary memorandum by Reuters Ltd on the Cross-Border Regulation of Financial Services E-Commerce


  1.1  Until recently there has been insufficient attempt to co-ordinate internationally the regulation of financial services e-commerce. National regulators have asserted independent jurisdiction over everything coming in and going out of their territories thereby causing multiple and inconsistent barriers for the cross border online supplier. This is an important issue as financial services e-commerce is one of the key drivers behind the future development of e-commerce, and is perhaps the most obvious online sector where the UK, with its traditional leadership in international financial services, could be expected to dominate. It is also particularly important to Reuters given our newly-redefined corporate objective of making financial markets really work on the Internet.

  1.2  In particular, consumer investment activity is one of the most dynamic forces driving the growth of the Internet and the Internet is now full of high quality investor relevant content. The private investor is thereby empowered as never before as he has access to investor-relevant information previously restricted to market professionals[8]. Most ISPs are collating news, stock prices, broker reports, financial advertising and other types of investor-relevant content in a bid to attract subscribers by adding value to their products.

  1.3  As stated above, the UK, as the global leader in financial services, has perhaps the most to gain from this positive development and should therefore seek to be the leader in e-commerce financial services. However, changing business models require a similar shift in regulation. At the core of this shift, must be enhanced co-operation between national regulators to ensure that cross-border e-commerce is not unnecessarily impeded by regulatory crossfire.

  1.4  This change is needed because national securities regulation is (a) largely impotent in the face of the foreign-based transborder fraudster and (b) can constitute a barrier to the legitimate trader that can be every bit as destructive as more conventional barriers to trade—"we suspect some barriers are industry protectionism dressed in consumers' clothing" (Howard Davies, April 1999).

  1.5  Essentially, the problem is with the regulators and not with the regulated:

    —  there are so many of them: they can now resemble the patchwork of Italian polices forces of former years;

    —  they are supervising national territories of decreasing relevance as financial markets themselves internationalise; and

    —  they rarely have confidence in each other's regulatory abilities and, except within the EU where progress is now being made under the auspices of the Forum of European Securities Commissions, pay little more than lip service to co-ordinating their regulations.[9]

  1.6  We believe there is a need for a new International Regulatory Paradigm in which national financial services regulators:

    —  learn to trust and to co-operate with one another; and

    —  accept exclusive "home state" supervision of firms from countries with an acceptable level of supervision (USA, Canada, Australia, New Zealand etc.) doing business in their territories. In short, we would like to see the pioneering country of origin regulatory formula in the recently-adopted E-Commerce Directive extended outside the EU to a select group of countries. This should be supported by cheap and transparent crossborder alternative dispute mechanisms. Service suppliers in countries without the benefits of mutual recognition will consequently be at a competitive disadvantage to suppliers in countries that do, and will therefore pressure their governments to improve their regulation, resulting in a general increase in standards.


  2.1  Given the opportunity for the UK to become a global leader in online financial services, it was of great disappointment to Reuters that two successive Treasury consultation papers on financial promotion proposed that the UK should have regulatory control over any financial advertising "capable of" having an effect in the UK. This impracticably wide jurisdictional stance was narrowed down in draft secondary legislation to a "directed at" "country of reception" approach, but remained unsatisfactory for several reasons:

    —  "Country of reception" goes against the "country of origin" position now accepted in the EU E-Commerce Directive and will therefore continue to cause duplication and inconsistencies for cross-border online providers of financial services.

    —  If other countries adopt similar "country of reception" approaches, UK online service providers will be exposed to multiple and inconsistent regulation. Several EU member states— France, Germany, Italy, and the Netherlands—have all published separate and inconsistent regulations over crossborder promotions: what hope is there for an EU Single Market?!

    —  Having primary and secondary legislation take conflicting jurisdictional approaches will confuse and possible deter overseas online companies supplying into the UK.

  2.2  We are pleased that the latest draft of the ESMB has been amended to provide for the UK to enable the UK to modify this position in the future, and we now understand that HMT will introduce country of origin regulation for financial promotions emanating from within the EU once the E-Commerce Directive comes into force. Looking forward we urge HMG, perhaps via the EU, to make this change as soon as possible, and to lead international negotiations in agreeing mutual recognition with a small group of countries that have adequate standards of supervision.


  3.1  It would appear that the Treasury's initial proposals on financial promotion were partly unfriendly to e-commerce because HMT may not have made sufficient efforts to inform itself about e-commerce developments being led by DTI who had been negotiating—and strongly supporting—the country of origin principles of the e-Commerce Directive. Given that online financial services is the only area of e-commerce not driven by the DTI or E-Envoy's office, we are pleased to note that co-ordination between the three departments has improved significantly since the first Treasury draft and we hope this will be reflected in the expected third re-draft of the secondary legislation on financial promotion.

  3.2  The forthcoming Commission Communication on financial services e-commerce expected later this year will hopefully provide welcome support for the e-Commerce Directive's country of origin principle to be extended to all financial services.

  3.3  Greater use of the newly extended EU Transparency Directive (Directive 98/48/EC)—which requires all proposed national legislation that affects Information Society services (including most financial services e-commerce) to be notified to the Commission and other Member States for comment—should ensure that HMT and other government department measures relating to e-commerce are well thought out in the future to avoid being delayed under the scrutiny mechanisms of the Transparency Directive.

  3.4  See 1.5 above for our belief that a new regulatory paradigm is required.

  We should be pleased to provide further written information if that would be helpful.

17 May 2000

8   This is a point Laura Unger, a US Securities and Exchange Commissioner, recognised in a speech last year on the regulatory challenges presented by online financial services (available at Back

9   We also note that the International Organisation of Securities Commissions (IOSCO) is meeting this week on the theme of Global Markets, Global Regulation. Back

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