SUP App 3.5 The right of establishment

Article 43 (formerly 52) of the Treaty grants nationals of an EEA State the right to establish themselves in another EEA State and, if they are already established in one EEA State, to set up agencies, branches or subsidiaries in any other EEA State.

The right of establishment assumes a non-temporary presence in the Host State.

The European Commission has issued statements about the treatment of a credit institution or insurance undertaking that maintains a permanent presence in the EEA State in which it provides services. It has stated that such an institution or undertaking comes, in principle, under the Treaty provisions on the right of establishment. The European Court of Justice has ruled that: "A national of a Member State who pursues a professional activity on a stable and continuous basis in another Member State where he holds himself out from an established professional base to, amongst others, nationals of that State, comes under the provisions of the 'right of establishment', and not those 'relating to services' (Case C-55/94 Gebhard [1995] ECR I-4165). The European Commission has also indicated that a banking activity exercised within a territory in a durable, frequent or continuous manner by a credit institution exercising the freedom to provide services, may fall under the right of establishment.

On the basis of previous cases, the European Commission's view is that:

1. (1)

   a credit institution or insurance undertaking may be working within the territory of an EEA State in order to carry out a limited number of tasks in connection with existing customers. Such a credit institution or insurance undertaking could have the infrastructure necessary to perform these tasks without being deemed to be 'established' within the meaning laid down in Community law;

2. (2)

   if, however, the credit institution or insurance undertaking went beyond the limited number of tasks referred to in (1), it could fall within the scope of the right of establishment. This may arise if, for example, it were to approach nationals of the Host State offering banking services in the same way as a branch would do.

The Single Market Directives state the following about the meaning of 'branch':

1. (1)

   Article 1 of the Banking Consolidation Directive provides that a branch is "a place of business which forms a legally dependent part of a credit institution and which carries out directly all or some of the transactions inherent in the business of credit institutions".

2. (2)

   Article 1 of the Investment Services Directive provides that a branch is "a place of business which is a part of an investment firm, which has no legal personality and which provides investment services for which the investment firm has been authorised".

3. (3)

   Article 1 of the Consolidated Life Directive and Article 3 of the Second Non-Life Directive provide that "...any permanent presence of an undertaking in the territory of a Member State shall be treated in the same way as an agency or branch, even if that presence does not take the form of a branch or agency, but consists merely of an office managed by the undertaking's own staff or by a person who is independent but has permanent authority to act for the undertaking as an agency would."

The Single Market Directives state that all a firm's places of business in any particular EEA State are treated as a single branch. So, once a firm has satisfied the conditions for establishing a branch in another EEA State as referred to in SUP 13.5.1 R (Specified contents: notice of intention to establish a branch), there is no requirement to follow these procedures in respect of the establishment of further places of business in that same EEA State. It should be noted that different principles may apply in respect of the overseas territories of some EEA States. Firms should also note that changes to a firm's places of business are likely to result in changes to the firm's requisite details (see SUP 13.6 (Changes to branches)). With regard to the position in Gibraltar, firms should be aware of the requirements of the Financial Services and Markets (Gibraltar) Order 2001 (2001/3084).

The European Court of Justice has held that, if a firm has access to an independent person or intermediary established in the territory of an EEA State, it may fall within the rules on the right of establishment. This applies if the firm maintains the access so as to carry on activities in that EEA State on a stable and continuous basis. The European Court of Justice has ruled that:

1. (1)

   "...an insurance undertaking of another Member State which maintains a permanent presence in the Member State in question comes within the scope of the Treaty on the right of establishment, even if that presence does not take the form of a branch or agency, but consists merely of an office managed by the undertaking's own staff or by a person who is independent but authorised to act on a permanent basis for the undertaking, as will be the case with an agency." (Case 205/84 Commission v Germany [1986] ECR 3755).

2. (2)

   "One of the essential characteristics of the concepts of branch or agency is the fact of being subject to the direction and control of the parent body." (the De Bloos case (Case 14/76 [1976] ECR 1459)).

The European Court of Justice has held that "The concept of branch, agency or other establishment implies a place of business which has the appearance of permanency, such as the extension of a parent body, has a management and is materially equipped to negotiate business with third parties, so that the latter, although knowing that there will, if necessary, be a legal link with the parent body, the head office of which is abroad, do not have to deal directly with such parent body but may transact business at the place of business constituting the extension." (the Somafer case (Case 33/78 [1978] ECR 2183)).

The European Commission considers that, for the use of an intermediary or independent person to result in a firm possibly falling within the scope of the right of establishment, three criteria must be met. These criteria are as follows:

1. (1)

   the intermediary or independent person must have received a permanent mandate or brief which must:

   1. (a)

      be long-term and continuous and not be limited in time or be a one-off instruction; and

   2. (b)

      relate to the activities that are part of the insurance undertaking's or credit institution's objectives;

2. (2)

   the intermediary or independent person must be subject to the direction (in the case of insurance) or management (in the case of banking) and control of the credit institution or insurance undertaking he represents. The European Commission believes that "an exclusive brief received by an independent intermediary from a single insurer is an indication that the intermediary is subject to the direction and control of that insurer". To ascertain if this condition is met, a check should be made, in particular, to:

   1. (a)

      see whether the intermediary or independent person is free to organise his or her own work and to decide what proportion of time to devote to the credit institution or insurance undertaking;and

   2. (b)

      consider whether the intermediary or independent person can represent competitors or is bound by an exclusive agreement;

3. (3)

   the intermediary or independent person must be able to commit the credit institution or insurance undertaking. To satisfy this condition the following will apply:

   1. (a)

      the acts or decisions of the intermediary or independent person must be able to commit the insurance undertaking or credit institution in transactions with third parties, as determined in the case law of the European Court;

   2. (b)

      the intention on the part of the insurance undertaking or credit institution to be directly committed may also be shown by the intermediary or independent person's brief;

   3. (c)

      the intermediary or independent person can make a complete offer on behalf of a credit institution or insurance undertaking even if only the credit institution or insurance undertaking can sign the contract. This condition is not met if the credit institution or insurance undertaking can reject the proposal or refuse to sign the contract.

The European Commission has stated in its communications that, if the use of an intermediaryor independent person results in a credit institution or insurance undertaking falling within the scope of the right of establishment, the person would not constitute a branch because it is independent and not part of the firm's business (see SUP App 3.5.5 G (Definition of branch)). However, in such cases, a passporting notification would be required.

If an insurance undertaking provides services within the territory of another EEA State under the freedom to provide services, the European Commission has indicated that it can use the services of independent persons in that EEA Statewithout falling within the scope of the right of establishment. It has also indicated that this can be either upstream or downstream of the transaction without establishing a branch. Examples include:

1. (1)

   local experts who assess the risks to be covered but who do not conclude contracts of insurance and whose activity is limited to forwarding insurance proposals;

2. (2)

   local medical services;

3. (3)

   a permanent structure for collecting premiums or receiving notices of claims;

4. (4)

   canvassers who do not conclude contracts of insurance and whose activity is limited to forwarding insurance proposals.

Where local experts conclude claims settlements, they may be regarded as performing activities falling within the scope of establishment.

In the case of credit institutions, theEuropean Commission has also indicated that marketing services through an intermediary that is itself a credit institution should not require prior notification as the intermediary will be supervised in its activities by its Home State.

Automatic telling machines (ATMs) capable of performing the banking or insurance activities listed in the Single Market Directives may form the only presence of a credit institution or insurance undertaking in a Member State. The European Commission considers that, where this is the case, they are unlikely to be covered by the right of establishment. The FSA considers that ATMs can only be considered to be an establishment if the three criteria referred to in SUP App 3.5.9 G (Use of an intermediary or independent person) are satisfied to the extent that they apply to a credit institution or an insurance undertaking.