National Smartcard Project

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

2. 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

3. Executive Summary 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

4. 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

5. 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?

6. 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?

7. 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

8. 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

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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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