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Neutral territory

Last week, on a round-trip train journey between London and Leeds, I had to read all 134 pages of the FSA&#39s approach to the regulation of e-commerce. Somewhere around page 50,I found myself looking for a door to jump out of. Unfortunately on the current GNER rolling stock you cannot do this while the train is moving.

This is really the first time we have seen any substantial output from the regulator or its predecessors on e-commerce for several years. The FSA has struggled to get to grips with the subject of e-commerce I suppose understandably it has seemed more focused on getting its organisation up and running rather than meeting the challenges of e-commerce.

Such challenges, however, have not gone away and with new media becoming ever more significant distribution for financial services as every day goes by, the need for a clear regulatory view becomes more urgent.

Apparently, the FSA now sees e-commerce as so important that it is to be one of its four themes. OK, so it sounds like it is treating it seriously but this document is more a matter of identifying the size of the issues it needs to approach and putting forward some initial thoughts rather than delivering a firm set of rules.

This might be somewhat frustrating for anyone hoping for clear rules to work to, it is better that the regulator should widely consult on the practicalities of the market before setting things in stone.

The FSA has been clever in taking a position that it intends to be technologically neutral, that is, not to “discriminate in its approach on the basis of delivery channels alone, unless the risks to the statutory objectives from the different delivery channels justify it”.

In other words, it has given itself the latitude to take an equal approach to all channels as a matter of course but modify this should it feel certain channels warrant it.

As I see it, one of the positive outcomes of the dotcom downturn is that there are far fewer people around from the new media industry saying existing players do not understand how they should run financial services or understand the internet.

All too often this meant that potential new players did not want to have to adhere to existing regulatory structures and just wanted carte blanche to deliver whatever they wanted in the way they wanted.

By adopting technological neutrality, the FSA is giving a clear and correct indication that it is the four guid- ing principles of regulation that are important. There does seem to be an increased recognition that technology can streamline the delivery and regulation of financial services and it is important they do not impede this for the sake of working in the same way across all channels.

One of the things about the internet that has clearly challenged financial services regulators in the past has been their struggle to get to grips with its truly global nature. At least the FSA is now trying to grapple with it.

Some people may remember the laughable statements from SIB some five years ago that all the world&#39s financial regulators were going to get together and agree how to regulate the internet. All this proved was that it just did not have a clue what it was dealing with.

It is interesting to note a number of occasions within the document where I got the feeling that the FSA would have liked to take an approach but could not do so in relation to the European Economic Area as it is precluded from certain action by European Union rules.

An example of this is the EU electronic commerce directive which provides that when marketing products to individuals in another EU state, the disclosure and other provisions for online services should be based upon the country in which the service is based rather than the country of the consumer.

An extensive list of conclusions are drawn and, while I do not have sufficient space to explore these in detail here, anyone interested in the positioning of their businesses relative to competitors abroad should give these sections a thorough read.

Although making it very clear that they accept it is not an activity that they are authorised to regulate, it is fairly obvious from the report that the authority is very uncomfortable with the concept of aggregation.

I am aware that a number of the players in this field are keen to try to ease such concerns and that at least some would prefer it if aggregation could become a regulated activity in order to address both regulatory and consumer confidence. Reading this document, there is clearly a great deal aggregators need to do.

It would be very easy to be highly critical of the document as delivered by the FSA but, on balance, I believe it will be far more productive if the industry engages with the FSA to assist it in answering the many questions raised in this document. Who knows, we may even get a form of regulation that meets the needs of the industry and consumers as well as those of the regulator.

Concerns on the effect of existing EU regulation also appear in the section relating to digital signatures which notes that European law prevents members states from regulating the provision of trust services so any firm can provide such services which could include digital certificates.

There is a strong implication that such a situation might undermine the extent to which digital certificates could be used as proof of identity for the purpose of money laundering. If this were not allowed, it is easy to see the whole concept of e-commerce as a way of attracting new business could be very seriously undermined.

Notwithstanding concerns about the ease with which it is possible for businesses to set up as providers of digital certificates, I believe it is essential to find a way that regulators can be sufficiently comfortable about their use in this important way.

The FSA&#39s approach to the regulation of e-commerce can be downloaded from the FSA website at The document lists 66 questions to which responses are requested from interested parties. These should be received by the FSA by September 30.


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