SYSC App 1.1 Matters reserved to a Home State regulator (see SYSC 1.1.1 R (1)(b) and SYSC 1.1.1 R (1)(c))

The application of SYSC 2.1.3 R, SYSC 2.2.3 G and SYSC 3 to an incoming EEA firm or incoming Treaty firm depends on whether responsibility for the matter in question is reserved to the firm's Home State regulator. This appendix contains guidance designed to assist such firms in understanding the application of those provisions. This appendix is not concerned with the FSA's rights to take enforcement action against an incoming EEA firm or an incoming Treaty firm, which are covered in the Enforcement manual (ENF), or with the position of a firm with a top-up permission.

The Single Market Directives and the Treaty (as interpreted by the European Court of Justice) adopt broadly similar approaches to reserving responsibility to the Home State regulator. To summarise, the FSA, as Host State regulator, is entitled to impose requirements with respect to activities carried on within the United Kingdom if these can be justified in the interests of the "general good" and are imposed in a non-discriminatory way. This general proposition is subject to the following in relation to activities passported under the Single Market Directives:

1. (1)

   the Single Market Directives expressly reserve responsibility for the prudential supervision of an ISD investment firm, BCD credit institution, UCITS management company or passporting insurance undertaking to the firm'sHome State regulator. The IMD reaches the same position without expressly referring to the concept of prudential supervision. Accordingly, the FSA, as Host State regulator, is entitled to regulate only the conduct of the firm's business within the United Kingdom;3

2. (2)

   article 11 of the ISD sets out various rules of conduct which the FSA, as Host State regulator, is required to impose on an ISD investment firm (including a BCD credit institution which is an ISD investment firm) in relation to core investment services (and, where appropriate, to non-core investment services) provided within the United Kingdom;

3. (3)

   for a BCD credit institution, the FSA, as Host State regulator, is jointly responsible with the Home State regulator under article 27 of the Banking Consolidation Directive for supervision of the liquidity of a branch in the United Kingdom;

4. (4)

   for an ISD investment firm (including a BCD credit institution which is an ISD investment firm), the protection of clients' money and clients' assets is reserved to the Home State regulator under the ISD; and

5. (5)

   responsibility for participation in compensation schemes for BCD credit institutions and ISD investment firms is reserved in most cases to the Home State regulator under the Deposit Guarantee Directive and the Investor Compensation Directive.1

It is necessary to refer to the case law of the European Court of Justice to interpret the concept of the "general good". To summarise, to satisfy the general good test, Host State rules must come within a field which has not been harmonised at a Community level, satisfy the general requirements that they pursue an objective of the general good, be non-discriminatory, be objectively necessary, be proportionate to the objective pursued and not already be safeguarded by rules to which the firm is subject in its Home State.

The FSA considers that it is entitled, in the interests of the general good, to impose the requirements in SYSC 2.1.3 R to SYSC 2.2.3 G (in relation to the allocation of the function in SYSC 2.1.3 R (2)) and SYSC 3 on an incoming EEA firm and an incoming Treaty firm; but only in so far as they relate to those categories of matter responsibility for which is not reserved to the firm's Home State regulator.

Should the FSA become aware of anything relating to an incoming EEA firm or incoming Treaty firm (whether or not relevant to a matter for which responsibility is reserved to the Home State regulator), the FSA may disclose it to the Home State regulator in accordance with any applicable directive and the applicable restrictions in Part XXIII of the Act (Public Record, Disclosure of Information and Co-operation).

This appendix represents the FSA's views, but a firm is also advised to consult the relevant European Community instrument and, where necessary, seek legal advice. The views of the European Commission in the banking and insurance sectors are contained in two Commission Interpretative Communications (Nos. 97/C209/04 and C(1999)5046).

SUP 13A Annex 1 G5 summarises the application of the Handbook to an incoming EEA firm. That annex indicates in broad terms, and in relation to such firms, those categories of matter which are reserved to a Home State regulator and those which the FSA, as Host State regulator, is entitled to regulate when carried on within the United Kingdom.

Examples of how the FSA considers that SYSC 3 will apply in practice to an incoming EEA firm (see SYSC 1.1.4 R) are as follows:

1. (1)

   The Prudential Standards part of the Handbook6 (with the exception of INSPRU 1.5.33 R on the payment of financial penalties6 and the4Interim Prudential sourcebook (insurers) (IPRU (INS)) (rules 3.6 and 3.7)4do not apply to an insurer which is an incoming EEA firm. Similarly, SYSC 3 does not require such a firm:

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   1. (a)

      to establish systems and controls in relation to financial resources (SYSC 3.1.1 R); or

   2. (b)

      to establish systems and controls for compliance with that Prudential Standards part of the Handbook6 (SYSC 3.2.6 R); or

      6
   3. (c)

      to make and retain records in relation to financial resources (SYSC 3.2.20 R).

2. (2)

   The Conduct of Business sourcebook applies to an incoming EEA firm. Similarly, SYSC 3 does require such a firm:

   1. (a)

      to establish systems and controls in relation to those aspects of the conduct of its business covered by applicable sections of COB (SYSC 3.1.1 R);

   2. (b)

      to establish systems and controls for compliance with the applicable sections of COB (SYSC 3.2.6 R); and

   3. (c)

      to make and retain records in relation to those aspects of the conduct of its business (SYSC 3.2.20 R).2

See also Question 12 in SYSC 2.1.6 G for guidance on the application of SYSC 2.1.3 R (2).