Under the Treaty, the freedom to provide services within the EC may be exercised in three broad ways:
where the provider of a service moves temporarily to another EEA State in order to provide the service;
where the service is provided without either the provider or the recipient moving (in this situation the provision, and receipt, of the service may take place by post, telephone or fax, through computer terminals or by other means of remote control);
where the recipient of a service moves temporarily to another EEA State in order to receive (or, perhaps, commission the receipt of) the service within that State.
In the opinion of the European Commission (and in the wording of the Single Market Directives) "only activities carried on within the territory of another Member State should be the subject of prior notification" (Commission interpretative communication: Freedom to provide services and the interests of the general good in the Second Banking Directive (97/C 209/04)). In determining, for the purposes of notification, whether a service is to be provided 'within' another EEA State, it is necessary to determine the place of supply of the service.
An insurance undertaking that effects contracts of insurance covering risks or commitments situated in another EEA State should comply with the notification procedures for the provision of services within that EEA State. The location of risks and commitments is found by reference to the rules set out in paragraph 6 of schedule 12 to the Act, which derive from article 1 of the Consolidated Life Directive and article 2 of the Second Non-Life Directive. It may be appropriate for insurers to take legal advice as to how these rules are interpreted and applied in other EEA States. The need to passport may arise because of only one of the risks covered by an insurance policy. This includes, for example, where a policy covers a number of property risks and one of those properties is in another Member State.
In respect of banking services, the European Commission believes that "...to determine where the activity was carried on, the place of provision of what may be termed the 'characteristic performance' of the service i.e. the essential supply for which payment is due, must be determined" (Commission interpretative communication: Freedom to provide services and the interests of the general good in the Second Banking Directive (97/C 209/04)). In the FSA's view , this requires consideration of where the service is carried out in practice.
The FSA is of the opinion that UK firms that are credit institutions and ISD investment firms should apply the 'characteristic performance' test (as referred to in SUP App 3.6.7 G) when considering whether prior notification is required for services business. Firms should note that other EEA States may take a different view. Some EEA States may apply a solicitation test. This is a test as to whether it is the consumer or the provider that initiates the business relationship.
In the case of a UK firm conducting portfolio management, for example, this would mean looking at where the investment decisions and management are actually carried on in order to determine where the service is undertaken. Similarly, a UK stockbroker that receives orders by telephone from a customer in France for execution on a UK exchange may be deemed to be dealing or receiving and transmitting orders within the territory of the United Kingdom. In such a case, whether the firm solicited the overseas investor would be irrelevant.
intends to send a member of staff or a temporarily authorised intermediary to the territory of another EEA State on a temporary basis to provide financial services; or
the firm should make a prior notification under the freedom to provide services.
The key distinction in relation to temporary activities is whether a firm should make its notification under the freedom of establishment in a Host State, or whether it should notify under the freedom to provide services into a Host State. It would be inappropriate to discuss such a complex issue in guidance of this nature. It is recommended that, where a firm is unclear on the distinction, it should seek appropriate advice. In either case, where a firm is carrying on activities in another Member State under a Single Market Directive, it should make a notification.
The European Commission has made the following statements on the subject of temporary activities:
"...the fact of temporarily visiting the territory of a Member State to carry on an activity preceding (e.g. survey of property prior to granting a loan) or following (incidental activities) the essential activity does not, in the Commission's view, constitute a situation that is liable in itself to be the subject of prior notification. The same is true of any visits which a credit institution may pay to a customer if such visits do not involve the provision of the characteristic performance of the service that is the subject of the contractual relationship.";
"...temporarily visiting the territory of a Member State to conclude contracts, prior to the exercise of a banking activity should not be regarded as exercising the activity itself.";
"...if the service is supplied to a beneficiary who has gone in person for the purpose of receiving that service, to the Member State where the institution is established, prior notification should not take place."
If, however, the credit institution sends a member of staff or a temporarily authorised intermediary to the territory of another EEA State to provide the 'characteristic performance' of banking services to its non-resident customers, the European Commission believes that prior notification is necessary.
The European Commission is of the opinion that "a bank may have non-resident customers without necessarily pursuing the activities concerned within the territory of the Member State where the customers have their domicile" (Commission interpretative communication: Freedom to provide services and the interests of the general good in the Second Banking Directive (97/C 209/04)).
The FSA considers that, in order to comply with Principle 3:Management and control (see PRIN 2.1.1 R), a firm should have appropriate procedures to monitor the nature of the services provided to its customers. Where a UK firm has non-resident customers but has not notified the EEA State in which the customers are resident that it wishes to exercise its freedom to provide services, the FSA would expect the firm's systems to include appropriate controls. Such controls would include procedures to prevent the supply of services covered by the Single Market Directives in the EEA State in which the customers are resident if a notification has not been made and it is proposed to provide services otherwise than by remote communication. In respect of insurance business, the insurer's records should identify the location of the risk at the time the policy is taken out or last renewed. That will, in most cases, remain the location of the risk thereafter, even if, for example, the policyholder changes his habitual residence after that time.
In respect of banking services, the European Commission stated in its interpretative communication: Freedom to provide services and the interests of the general good in the Second Banking Directive (97/C 209/04) that:
"The provision of distance banking services, for example via the Internet, should not, in the European Commission's view, require prior notification, since the supplier cannot be deemed to be pursuing its activities in the customer's territory". This is because, as stated in SUP App 3.5.7 G (Use of an intermediary or independent person), the European Commission believes that banking services are deemed to be provided where the 'characteristic performance' of the service is carried out, that is, where the service is carried out in practice. The European Commission notes, however, that "as long as the Court has not ruled on this issue, any credit institution is at liberty to choose, for reasons of legal certainty, to make use of the notification procedures provided for in the Second Banking Directive even if, according to the criteria proposed above, notification may not be necessary".
In respect of insurance business, the European Commission, in its interpretative communication: Freedom to provide services and the general good in the insurance sector (200 0/C 43/03), stated that:
"The use of remote means of communication (telephone, fax the press etc) and in particular electronic commerce (e.g. via the Internet) to conclude insurance policies covering a risk (or commitment) situated in a Member State other than the Member State of establishment of an insurer should be regarded as insurance business carried on under the freedom to provide services with no movement on the part of the contracting parties.";
"...the place where the technological means used for providing the service are located (e.g. where the Internet server is installed)" may not be relevant in determining the Member State of establishment of the insurance undertaking concluding a policy by remote means which will be its head office or branch; and
"...an insurance undertaking operating from one EC State which is prepared to conclude via the Internet contracts of insurance covering risks or commitments situated in other EC States will probably be required to comply with the notification procedures for the provision of services."
However, the European Commission has also stated in its interpretative communication: Freedom to provide services and the general good in the insurance sector (2000/C 43/03) that:
"...the use of electronic commerce methods for the sole purposes of advertising, providing commercial information or enhancing awareness of the insurance undertaking cannot be regarded as an insurance activity;" and
"... it is out of the question to make such advertising and information activities subject to the notification procedures laid down by the Third Directives (Article 34 and following) which was designed for actual insurance activities carried on under the freedom to provide services."
If a fixed automatic telling machine, capable of performing banking or insurance activities, is the only presence of a credit institution or insurance undertaking in an EEA State, the European Commission believes that "...it may be possible to treat it as a provision of services in the territory of that Member State." This right exists, according to theEuropean Commission, regardless of the presence of a person or company in the EEA State responsible for equipping it or dealing with technical problems.
Where the duties of an intermediary consist only of seeking customers for a credit institution, however, the European Commission believes that the credit institution cannot be considered to be necessarily intending to carry on its activities in the territory of the EEA State. So, notification may not be required. However, UK firms should note that some EEA States do not take this view. Therefore, UK credit institutions should confirm the position with the relevant Host State regulator before engaging an intermediary in that EEA State to seek customers.
the independent person works for an insurance undertaking which has not given him an exclusive brief (even if another insurance undertaking has given the independent person an exclusive brief in respect of certain other classes of insurance); or
The FSA is of the opinion that where a UK firm becomes a member of a regulated market that has its registered office or, if it has no registered office, its head office, in another EEA State, the same principles as in the 'characteristic performance' test should apply. Under this test, the fact that a UK firm has a screen displaying the exchange's prices in its UK office does not mean that it is dealing within the territory of the Home State of the regulated market.
In relation to the need for a credit institution to notify where its advertising is available to persons in a particular Member State, the European Commission, in its interpretative communication (Freedom to provide services and the interests of the general good in the Second Banking Directive (97/C 209/04)), stated that:
"the prior existence of advertising or an offer cannot be linked with the need to comply with the notification procedure"; However the existence of an advertisement may indicate that there is an intention to provide services which would trigger the need for notification;
"canvassing customers from a distance does not necessarily mean that an institution plans to provide services within the territory of another Member State."
The European Commission's rationale for the views referred to in SUP App 3.6.28 G (1) and (2) is that "...for the sake of simplicity and in keeping with the Second Directive, all forms of advertising, targeted or otherwise, and all offers of service made at a distance by any means whatsoever (e.g. post, fax, electronic mail) should be exempt from the requirements of prior notification. Only if a credit institution plans to carry on its activities within the territory of the customer's country under the freedom to provide services...will it be obliged to notify" (Commission interpretative communication: Freedom to provide services and the general good in the insurance sector' (2000/C 43/03).
In relation to insurance undertakings, the European Commission has expressed the view that "...in accordance with the Third Directives, all forms of advertising by whatever means (mail, fax, electronic mail etc) should not be subject to the notification procedures referred to in Article 34 et seq. of the Third Directives. It is only if the insurance undertaking plans to carry on insurance activities under the freedom to provide services and only if it offers insurance products to potential clients established in another Member State that it must comply with the notification procedure." (Commission interpretative communication: Freedom to provide services and the general good in the insurance sector (2000/C 43/03 ).
The European Commission has not expressed a view about the circumstances where notification may be needed where investment firms advertise in other Member States. In the FSA's opinion, the European Commission's views on the need for credit institutions and insurance undertakings to notify their intention to provide services in another Member State can be applied, in general terms, to investment firms. However, given the broad range of activities covered by the Investment Services Directive, due account may need to be taken of the particular circumstances in which the investment firm's advertisements are made available to persons in the United Kingdom. In this respect, it is notable that there is no concept under the Regulated Activities Order of offering to carry on a regulated activity being a regulated activity in its own right. This is a change to the earlier position under the Financial Services Act 1986. This change seems consistent with the fact that overseas investment firms may be able to make their advertisements available to persons in the United Kingdom without needing to notify under the Investment Services Directive.