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

7.48 p.m.

Lord McIntosh of Haringey rose to move, That the draft order laid before the House on 16th May be approved [30th Report from the Joint Committee].

The noble Lord said: My Lords, even the title of this order is a major mouthful, and describing its effects will take us into technical and complex territory. I am afraid, however, that all of that is necessary. The draft order's objective is simple and is reflected in its title: to amend the UK's financial promotion regimes to bring them into line with the requirements of the European directive on e-commerce.

The draft order applies only to promotions that constitute what the directive refers to as information society services—which I hope I will be forgiven for calling ISS. There is a detailed definition of ISS in the European Technical Standards Directive (98/34/EC) which I think is about one and a half pages long. For most purposes, however, ISS are probably best thought of as services provided over the Internet. The draft order is therefore of most interest to those who

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undertake, receive or transmit financial promotions on-line. It does not apply to non-ISS financial promotions.

Before turning to the detail of the draft order, it might be helpful if I reminded the House of previous remarks that I have made on the impact of the e-commerce directive on the UK's financial promotion regimes. During the passage of the Bill for the Financial Services and Markets Act, I told the House:


    "The UK is committed to ensuring that the financial promotion regime complies with all Community requirements",

and,


    "in particular with regard to territorial jurisdiction and other requirements [the E Commerce Directive] . . . might place on the UK's financial promotion regime".—[Official Report, 18/4/00; col. 568.]

Last year, during debate on the original draft financial promotion order, I repeated that commitment and made clear that the Government would,


    "seek approval to amend [the financial promotion order] ... to implement the ... e-commerce directive".—[Official Report, 29/03/01; col. 522.]

The draft order amends both the general financial promotion regime and the regime governing the promotion of collective investment schemes to ensure that they comply with the e-commerce directive. It achieves that first by bringing the scope of the UK's financial promotion regimes in line with the requirements of Article 3 of the directive.

Article 3 requires that financial promotions constituting ISS made from establishments in the UK to persons in other European economic area (EEA) states 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 promotions constituting ISS made or directed to persons in other EEA member states.

Likewise, financial promotions constituting full ISS made 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—undertakings for collective investment in transferable securities—scheme.

In general, the effect of these amendments to the scope of the UK's financial promotion regimes will be that firms established in the UK will be subject to those regimes for financial promotions which constitute ISS, regardless of where in the European economic area the promotions are received. The existing non-territorial exemptions to the financial promotion restrictions will remain available to such firms, and the order makes minor adjustments to some of those to ensure that they will continue to make sense in a Europe-wide context.

Conversely, the UK financial promotion restrictions will be lifted for financial promotions into the UK by firms established in other EEA states, where those promotions constitute ISS. However, the lifting of the financial promotion restriction in those

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circumstances is subject to exceptions for the areas referred to in article 3(3) of the directive and excluded from its reach. Those areas include the advertising of their units by UCITS, some requirements in the life and general insurance directives and contractual obligations concerning consumer contracts.

In addition to changing the 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. Again those changes bring the financial promotion regimes into line with articles 12 to 14 of the directive.

The effect of the amendments will be that, in line with the directive, those whose involvement in information society services is confined to the three activities just mentioned will not be subject to liability under the UK financial promotion regimes.

It is worth emphasising that all these changes to the UK'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. However, although these changes are limited to information society services and their providers, I want to make clear that 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 this can best be achieved through the mutual recognition of different national regulatory standards supplemented by the harmonisation of core standards of consumer protection at a European level—as provided, for example, by the forthcoming directive on the distance marketing of financial services. We are continuing to push this 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 brought forward at a European level.

In the meantime, we will continue to manage the transition to the country of origin approach in a way that is consistent with our EU obligations, which continues to provide core standards of protection for UK consumers and minimises the risk of dual regulation of UK business.

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 commend the order to the House. I beg to move.

Moved, That the draft order laid before the House on 16th May be approved [30th Report from the Joint Committee].—(Lord McIntosh of Haringey.)

Lord Newby: My Lords, on these Benches we support the order. In particular, we accept the country of origin principle on which it is based.

I wish to make two points on the order. I should then like to make two slightly more general points. First—and this was discussed last week when the order was debated in another place—what happens if a consumer

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of a product covered by the order seeks redress against the promoter, who happens to be based in another country? We know from experience that it is often difficult enough getting redress for products which are produced, sold, marketed and consumed in this country. But it will be much more difficult if I am buying over the Internet a financial product that may be marketed from the Netherlands, Spain, Italy or Germany. Considerably more thought needs to be given to this area in order to make sure that we do not just have complex legal provisions in place, but a user friendly system under which those provisions can be accessed and can benefit the consumer.

Secondly, what progress, so far as the Minister is aware, has been made elsewhere in the EU in implementing the directive, because, as with all directives, it is only as good as the extent to which it has been implemented elsewhere? I wonder whether, in terms of implementing something quickly, we are doing well in this area, and whether other member states are also moving ahead quickly.

My first general point relates to the volume of European legislation in this area and the implementation of the EU Financial Services Action Plan. The scale of the issue and of the work that needs to be done in the area was graphically highlighted in the recent London Investment Banking Association's (LIBA) annual report. Its chairman, Sir David Walker, pointed out that,


    "over the next year and a half, there are likely to be over twenty distinct directives, initiatives and measures of international policy which will affect [members of LIBA] ... mostly European. Taken together, they will be like a tidal wave".

My questions for the Minister are: how well is the Treasury geared up to handle that tidal wave? How many staff work exclusively in that area? And: what plans have been laid to augment them to deal with a particularly heavy concentration of work in the area over the next year or two?

My second general point relates to the issue of consumers being able to get redress if things go wrong and the importance of clarity in the regulation in that area; not least in the whole area of financial promotion. As the Minister knows, I have taken a particular interest in the problems of the split capital investment trust sector in recent times. There has been genuine concern and, indeed, difference of view between the regulator and the ombudsman about the remit of the ombudsman and the areas under which individual consumers can get redress.

To a considerable extent, those differences may have been reconciled in a letter which I received at the end of last week from the FSA with the support of the Financial Services Ombudsman (FSO). There now appears to be greater scope for cases to be referred to the FSO than was initially apparent. But a number of grey areas remain. It is quite clear that an individual consumer will need to apply to the FSO in order to establish whether the ombudsman can adjudicate in his particular case.

The broader issue, exemplified by those difficulties in domestic regulation, is that financial services regulation covers complex issues and requires the

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striking of a difficult balance between the interests of the regulated firms and the consumer. It also shows that, at first blush, legislation can often, despite the effort that we put into it, need amendment and need to be kept under continued review.

Happily, much of that is not for this evening. I repeat that we are happy to support the order before us tonight.

8 p.m.

Lord Kingsland: My Lords, my honourable friend Mr Howard Flight has subjected the text of the draft order to an intimate exegesis in another place. I do not intend to reconstitute his mellifluous prose in your Lordships' House. I shall confine myself to one or two general observations.

The principle issue here is the danger of having a playing field that is not level, due to the country-of-origin regulation of "information society services". As I understand it, the draft order covers persons providing or promoting financial products or services over the Internet. From a United Kingdom perspective, a person in, say, France who is free under French law to carry on the business of providing investment advice over the Internet may provide investment advice to persons in the UK over the Internet without being subject to the UK's Financial Services and Markets Act regulatory regime. On the other hand, a person in the UK who wishes to carry on the business of providing investment advice over the Internet must, under the Financial Services and Markets Act, become an authorised person, even if he intends to promote his business only to persons outside the UK. He must also bear the cost of complying with the Financial Services and Markets Act regulatory regime.

I accept that one advantage of country-of-origin regulation is that a person in the UK who is authorised under the Financial Services and Markets Act need not be concerned with the obligation to comply with local requirements in other EC countries when providing or promoting an "information society service" on the Internet into other EC countries. However, the e-commerce directive provides for several derogations that allow a member state to disapply the country-of-origin principle in certain cases. They are set out in the annex to the directive. One of the derogations is entitled "Contractual obligations concerning consumer contracts".

There is a concern that some member states will interpret that as allowing them to impose extensive provisions for the protection of their consumers, thus reintroducing host-state regulation. I understand, by contrast, that the United Kingdom Government have taken a restrictive view of the derogations and will seek to impose few additional requirements on persons in other EC countries who are promoting their services in the UK over the Internet.

Two questions occur to me. First, what steps will the Government take to protect consumers in the UK in the case of a person in the EC who is not regulated in his home state—because, for example, that state does

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not regulate the giving of investment advice—but who is free to provide investment advice to persons in the UK over the Internet, as a consequence of the implementation of the e-commerce directive in this country?

Secondly, what steps will the Government take to ensure that member states apply the derogations permitted under the e-commerce directive in a way that does not frustrate the purpose of the directive and put UK providers of financial services over the Internet at a disadvantage?


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