Financial and Credit services regulation: an overview

This guide is based on UK law. It was last updated in September 2008.

Overview

Businesses which:

• provide credit or loans
• hold deposits
• give investment advice
• sell insurance policies
• sell investment products, or
• offer any related services

are subject to strict regulation in most countries in the world.

Normally it is not difficult to determine whether a business is providing financial services: a company which offers banking facilities or sells insurance policies is clearly a financial services provider. However, certain financial services can be provided incidentally to some other business - for example, where an on-line retailer offers financial credit to its customers. And occasionally intermediaries can find themselves potentially entangled in financial regulations - for example, where an accountant gives financial advice in a chat room, or where a newspaper or web magazine 'publishes' an unauthorised investment advertisement.

Why have financial regulation?

Financial regulation has two main objectives:

• To prevent certain types of activity being carried on without specific authorisation (for example, most retail banking activities can only be carried on by authorised banks or similar institutions); and
• To protect consumers from being misled or pressured by a supplier's promotional activities (for example, most countries place restrictions on investment advertisements).

Providers of on-line services need to be aware of financial regulations because:

• they may require authorisation to carry on a particular activity in a particular country - even though their customers are situated elsewhere;
• their web-site will certainly be subject to regulation in their home country but may also have to comply with regulations in other countries from which it can be accessed;
• certain activities, products and services may be subject to local restrictions.

In which countries is authorisation required?

As a general rule, a financial services company needs to be authorised in each country in which it maintains an establishment from which it carries on business. The word 'from' is important. It goes without saying that a UK company which supplies financial services to UK customers requires authorisation in the UK. However, a UK company which carries on business exclusively with customers in France from an establishment in the UK also requires authorisation in the UK, even though none of its customers is situated there.

What amounts to an 'establishment' is not always clear. There is a general move to try to prevent suppliers from exploiting regulatory 'black holes' by splitting their activities between countries so the rules which bring a supplier within the regulatory net are flexible. For example, in certain circumstances, a server which is under a company's control may be found to constitute an establishment. A company with a registered office in the UK which carries on a 'regulated activity' elsewhere in the European Economic Area (EEA) will require authorisation in the UK even though activity is managed from elsewhere - the presence of the registered office will be considered sufficient.

However, the process of passporting (Passporting Frequently Asked Questions)allows UK firms to operate branches and sell across borders within the EEA without the need for authorisation in each jurisdiction. A UK firm could be granted a "passport" to operate a branch in another EEA country or for cross border business for example by telephone or internet. The firm has to notify the FSA of its intention and then the FSA will respond and notify the host state (see: Passporting Frequently Asked Questions).

In the case of financial promotion, the focus shifts to the consumer's country. A website which invites French consumers to buy services from a UK investment adviser will have to comply with French regulations as to investment advertisements, even though the UK investment adviser has no establishment in France.

This causes the on-line service provider particular problems. As a web-site can be accessed from every country in the world, does it have to comply with each country's financial promotion regulations?

The short answer is 'Yes - in most cases'. In practice, however, many regulators take the view (recommended by their 'trade association', IOSCO) that they should only enforce financial promotion regulations on an overseas web-site when the promotion in question is specifically directed at consumers in their country. It is therefore important that suppliers clearly identify their target markets and put in place statements and systems which screen out applications from other markets.

Other controls

Financial promotion is not the only activity which is subject to local laws. General promotional activity is also subject to regulation (see our guide, Internet Advertising) and most countries have specific laws regarding the formation of contracts with a financial content. For example, under current UK law, most applications for credit have to be in writing.

In addition, most financial services contracts made on-line within the  EU are subject to the right of the consumer to withdraw from the contract within 14 days (or 30 days for certain types of financial products) of having made it (see our guide, Distance Marketing of Consumer Financial Services).

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