SUP App 3.3 Background

1. (1)

   The European Community Treaty (the 'Treaty'), as amended by later Treaties, established in EC law the rights of freedom of establishment and freedom to provide services in the European Community.1

2. (2)

   The Treaty lays down central principles governing the legal framework for freedom of establishment and the free movement of services in the European Community. There are, however, a number of areas where the legal position is not clear. This includes, for example, identifying whether a service is provided through an establishment, where the issues involved are complex. Therefore, this Appendix is intended to provide guidance but cannot be regarded as comprehensive. Ultimately, the construction of the Treaty and relevant Directive provisions is a matter for the European Court of Justice.1

The Treaty provides the framework for the provision of banking, insurance business, investment business, UCITS management services and insurance mediation1, while the Single Market Directives clarify the rights and freedoms within that framework.

The agreement on the European Economic Area, signed at Oporto on 2 May 1992, extends EC legislation to any EEA State that is not part of the European Community.Any references to an EC Member State in this appendix should, therefore, be read as referring to an EEA State.

In 1997, the European Commission published an interpretative communication (Freedom to provide services and the interests of the general good in the Second Banking Directive (97/C 209/04)) (the text of this directive and the First Banking Directive is now consolidated in the Banking Consolidation Directive). The European Commission's objective in publishing this communication was to explain and clarify the Community rules. The European Commission deemed it desirable "to restate in a Communication the principles laid down by the Court of Justice and to set out its position regarding the application of these Principles to the specific problems raised by the Second Banking Directive".

In 2000, the European Commission published a further interpretative communication (Freedom to provide services and the general good in the insurance sector (2000/C43/03)). This allowed the European Commission to publicise its own interpretation of the rules on the freedom to provide services.

1. (1)

   The European Commission has not produced an interpretative communication on MiFID3. It is arguable, however, that the principles in the communication on the Second Banking Directive can be applied to investment services and activities3. This is because Chaper II of Title II of MiFID3 (containing provisions relating to operating conditions for investment firms3) also applies to the investment services and activities3 of firms operating under the Banking Consolidation Directive.1

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2. (2)

   The European Commission has not produced an interpretative communication on either the Insurance Mediation Directive or on the UCITS Directive.1

In giving its views, communications made by the European Commission have the status of guidance and are not binding on the national courts of EEA States. This is because it is the European Court of Justice that has ultimate responsibility for interpreting the Treaty and secondary legislation. Accordingly, the communications "do not prejudge the interpretation that the Court of Justice of the European Communities, which is responsible in the final instance for interpreting the Treaty and secondary legislation, might place on the matter at issue." (European Commission interpretative communication: Freedom to provide services and the general good in the insurance sector (C(99) 5046). However, the Courts may take account of European Commission communications when interpreting the Treaty and secondary legislation.

Firms should also note that European Commission communications do not necessarily represent the views taken by all EEA States.

The E-Commerce Directive covers services provided at a distance by means of electronic equipment for the processing (including digital compression) and storage of data. The services would normally be provided in return for remuneration and must be provided at the individual request of a recipient (see recital 17 of the E-Commerce Directive). The Directive implements the country of origin approach to regulation. This approach makes firms subject to the conduct of business requirements of the EEA State from which the service is provided. This is subject to certain derogations (see SUP App 3.3.11 G).

The E-Commerce Directive does not affect the responsibilities of Home State under the Single Market Directives. This includes the obligation of a Home State regulator to notify the Host State regulator of a firm's intention to establish a branch in, or provide cross border services into, the other EEA State.

There are, however, general derogations from the internal market provisions under article 3(3) of the E-Commerce Directive. The derogations include consumer contracts, the permissibility of unsolicited e-mail and certain insurance services (both life and non-life). Where these derogations apply, the EEA States in which the recipients of the service are based may continue to be able to impose their own requirements.

1The Single Market Directives require credit institutions, insurance undertakings (other than reinsurance undertakings)5, MiFID investment firms3, UCITS management companies and insurance intermediaries to make a notification to the Home State before establishing a branch or providing cross border services.

SUP 13.5 (Notices of intention) sets out the notification requirements for a firm seeking to establish a branch or provide cross border services. As firms will note, the decision whether a passport notification needs to be made will be a matter of interpretation. The onus is on firms to comply with the requirements of the Act and, where relevant, the laws of other EEA States. So, in cases of doubt, firms should obtain their own legal advice on the specific issues involved.

1Blanket notification is the practice of the Home State regulator notifying all Host State regulators in respect of all activities regardless of any genuine intention to carry on the activity. This practice is discouraged by the FSA. However, a firm may be carrying on activities in the United Kingdom or elsewhere in a way that necessarily gives rise to a real possibility of the provision of services in other EEA States. In such cases, the firm should consider with its advisers whether it should notify the relevant authorities and include that possibility in its business plan.