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Care in the Community

It seems that not a week can go by without some significant regulatory publication emerging that needs to be fully digested and examined in the context of our industry.

As if the steady flow from the FSA were not enough to wade through, the Treasury and European Union are now delivering a flood of documentation to be considered.

So when the subject matter is something that looks as innocuous as the EU&#39s e-commerce directive, it would be nice to think that this would not have the potential for too dramatic an impact on the personal finance industry. Sadly, this is far from the case.

Increasingly, in the last few weeks, I have found myself creating summaries of the main issues surrounding these various proposals, aiming to capture not only the key points but to translate them into language that can be understood by mere mortals rather than just super-regulators.

As if CP121 is not enough of a threat to financial advice as we know it, FSA consultation paper 129 could really turn everything upside down. The first thing to stress is that the FSA is in no way the guilty party on this occasion. CP129 is all about implementing the ECD. It has the difficult job of taking a directive that is at best ill-suited to the UK and finding a practical way of implementing it.

The most important concept introduced by the ECD is that of a country of origin approach to the delivery of electronic services over the internet. Until now, the provider of a service that can be accessed in another EU country has had to ensure that it meets the financial regulations in the country of the person receiving the service. This has placed a massive burden on the organisation providing the service.

Technically, if it can be accessed by people in other EU countries, an IFA&#39s web services should not only comply with FSA rules but also those of all the other countries in which it can be accessed.

From a practical perspective, in the past, non-UK regulators have tended to ignore sites that are clearly UK-only. Equally, UK regulators have tended not to worry about services that are clearly not targeted at UK consumers.

The good news is that these rules should make it far easier for UK organisations to target consumers elsewhere in the EU. The bad news is that it makes it far easier for companies in other EU countries to target UK customers.

IFAs must bear in mind European capital-adequacy requirements. The biggest problem is that, at least in the short term, the standards required of those targeting products at the UK may be lower than those required of UK companies seeking to sell abroad. The weakness is that financial regulation is by no means uniform across the community.

Although events surrounding Equitable Life and Independent Insurance have raised serious questions around the world as to the quality or otherwise of UK financial regulation, as anyone who works in the industry knows, we have a far tougher regulatory environment than most other countries. Some EU states currently have no such regulation at all.

This is an issue that has been recognised by Brussels and a programme is in place to achieve a core set of standards across the community. This involves a further set of directives including the investment services directive, insurance mediation directive and the prospectus directive. In addition, the distance marketing directive, due for implementation around 2004, is intended to help achieve a more consistent set of standards across the EU market. These new directives will all be based on a country-of-origin approach.

This is all very well but, in the short term, it means that someone in another EU state could create an online advice service with none of the protections that apply to consumers via the FSA and there is very little that UK regulators can do about it.

A series of exceptions to the ECD are available, known as derogations. These give regulators the ability to apply for case-by-case exceptions. However, this would clearly be time-consuming and expensive.

To make matters worse, the ECD only applies to electronic communication, so that companies offering services to citizens of other EU states will still have to abide by the local rules covering the country of the recipient for phone and postal communications, at least until the implementation of the DMD around 2004.

With the ECD, DMD and a whole host of other European legislation pending, I cannot help thinking that we are going through a major shake-up of the UK investment industry at exactly the wrong time. The Treasury has stated that it wants to see a common approach to regulating mortgages and general insurance in place via the FSA during second quarter of 2004.

Does it not now make sense to delay implementation of the CP121 proposals until the same time? This would allow a far longer period for consultation and the design of a single regulatory environment that will be truly consistent across the different disciplines. It would also help a large number of IFA businesses which want to make the transition to a defined-payment status but fear that the financial pain in such a tight timescale would be too great, to take steps over a reasonable period to move to operating methods that will allow them to keep their IFA status.

If this does not happen, we will end up repeating the whole exercise some time around 2005 with all the consequent costs.

I hope that the FSA&#39s cost-benefit analysis of the next stage of depolarisation includes exploring the option to delay until the European picture is clearer.

More details on my briefing papers on CP129 and other industry matters can be found at

Ian McKenna is a consultant and director of the Financial Technology Research Centre, which works for a wide range of industry organisations, life offices and technology companies, including Microsoft and The Exchange. He can be contacted by email at

Tel: 020 7935 2599


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