National Smartcard Project Work Package 8 – Report on financial services legislation

Report on financial services legislation Format of report: Executive summary Introduction Scope of report Separate parts for each area of law reviewed Introduction Application of the law Conclusions Appendices and Endnotes

The Executive Summary sets out: The aims of the Report on Financial Services Regulation, which are: to investigate the key legal issues surrounding financial services regulation and consumer protection as they may impact on e-money, debit facilities and credit facilities if they were to be made available on a Local Authority Smartcard to act as a discussion document for the National Smartcard Project board members A summary of the conclusions reached and applicable legislation and regulation Executive Summary

Introduction The Introduction explains: Purposes of report Parameters of report Context in which to be read Summary of key legislation and regulation reviewed Please note that the report should be read in conjunction with the Introductory Report

Scope of report The Scope of the Report sets out: Key focuses of this report: e-money debit facilities credit facilities Explanation of terminology used in report and context in which used in the report e-money What is e-money? Who might want to use e-money? How might e-money be made available on a Local Authority Smartcard?

Scope of report Explanation of terminology used in report and context in which used in the report (cont.) Debit facilities What are debit facilities? How might debit facilities be made available on a Local Authority Smartcard? Credit facilities What are credit facilities? How might credit facilities be made available on a Local Authority Smartcard?

Financial Services Regulation Introduction - a general overview of the law in relation to financial services as it applies in the UK Financial Services and Markets Act 2000 (“FSMA”) The Financial Services Authority (“FSA”) The Regulatory Regime in the UK The general prohibition “Regulated Activities” “Specified Investments” Other restrictions under the FSMA

Financial Services Regulation E-Money The E-Money Directive and its implementation in the UK What is e-money for the purposes of the FSMA? The regime in the UK The FSA Handbook on Electronic Money (known as "ELM1") published June 2003 The need to become an Electronic Money Institution and restrictions on such entities Exemption for small e-money issuers Conditions to be satisfied How to apply for exemption Ongoing compliance/administration and revocation

Financial Services Regulation E-Money (cont.) Other points Conclusion

Financial Services Regulation Debit facilities Analysis of the relevant law including the meanings of “deposit” and “accepting deposits” and the relevance of the “business element” test Conclusion Credit facilities Analysis of the relevant law (as above for debit facilities) Conclusion Other regulated activities

Financial Services Regulation Restrictions on Financial Promotion Overview of the financial promotion regime The prohibition: “a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity” unless it (i) is communicated by an authorised person; or (ii) is approved by an authorised person; or (iii) falls within an exemption Review of what this prohibition means in practice Application to a Local Authority Smartcard E-money? Debit facilities? Credit facilities? Conclusion

Anti-money Laundering Rules and Regulations and Associated Issues Introduction Money Laundering Regulations Second EC Directive on Money Laundering The current regime Application to facilities potentially available under a Local Authority Smartcard Proposed changes to the Money Laundering Regulations The FSA Handbook on Money Laundering The Joint Money Laundering Steering Group

Anti-money Laundering Rules and Regulations and Associated Issues Other important legislation Anti-Terrorism Crime and Security Act 2001 Proceeds of Crime Act 2002 Terrorism (United Nations Measures) Order 2001 Afghanistan (United Nations Sanctions) Order 2001 Conclusion

Consumer Credit Legislation Introduction – the Consumer Credit Act 1974 Key definitions Exemptions Other important points How Consumer Credit Act control may apply to a Local Authority Smartcard Scheme The Immediate Future – Proposed Changes to consumer credit legislation At European level AT UK level Conclusion

Consumer Protection - Distance Marketing of Consumer Financial Services Introduction The EU Directive on the Distance Marketing of Consumer Financial Services (“DMD”) European Commission's Financial Services Action Plan FSA’s responsibilities in the UK Overview of the DMD Some potential problems Conclusion

Appendices and Endnotes Appendix 1 – Summary of money laundering obligations Appendix 2 – Information to be provided to consumers under the EU Directive concerning the distance marketing of consumer financial services Appendix 3 – Table of key criminal offences Endnotes – mainly links to websites/urls