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Lord Kingsland: The noble Lord has been most generous and I am almost entirely reassured.

On Question, amendment agreed to.

[Amendment No. 122 not moved.]

Lord McIntosh of Haringey moved Amendment No. 123:

On Question, amendment agreed to.

[Amendment No. 124 not moved.]

Schedule 3, as amended, agreed to.

Schedule 4 [Treaty Rights]:

Lord McIntosh of Haringey moved Amendment No. 125:

    Page 234, line 20, leave out ("has the same meaning as in section 5(3)") and insert ("means persons who are consumers for the purposes of section 129").

On Question, amendment agreed to.

Lord Kingsland moved Amendment No. 126:

    Page 234, line 27, at end insert ("; and

"EEA credit institution" means an EEA firm falling within paragraph 5(b) of Schedule 3 whose authorisation under the first and second banking co-ordination directives covers one or more investment services (within the meaning of the investment services directive)").

The noble Lord said: In moving Amendment No. 126, I should like to speak also to Amendments Nos. 127, 128, 130, 131, 141 and 142.

Amendment No. 126 seeks to insert into Schedule 4 (at line 27 on page 234) the above definition relating to banks that are excluded from the investment services directive because their authorisation covers one or more investment services. The reference to paragraph 5(b) of Schedule 3 is to limit the relevant definition of EEA firms to credit institutions. In fact, the United Kingdom has voluntarily granted the equivalent of the investment services directive passport to these EEA credit institutions, even though they are legally entitled only to the second banking directive passport.

The key activities which were covered by the investment services passport, but not the second banking directive passport, are the receipt and transmission of orders and the arrangement of transactions in the secondary market. These are treated as included in the receipt and transmission of orders as a result of, I believe, the 13th preamble to the investment services directive.

The Bill does not allow for the grant of this voluntary ISD passport and therefore EEA credit institutions will find the position under the Bill rather worse than they did with its predecessor, the Financial Services Act 1986, which surely was not intended.

Amendment No. 127 seeks to insert at line 37,

    "except where the firm is an EEA credit institution".

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This amendment seeks to provide for the voluntary investment services directive passport. I accept that it could have been put into Schedule 3 itself, but it seemed to me that this would require substantial consequential amendments to be made to Schedule 3. I hope that the Minister will find the solution suggested here more satisfactory.

Since at present the voluntary investment services directive passport requires home state authorisation to carry on the regulated activity and the bank quite clearly has no EEA right to carry on these ISD passport activities, as they are not covered by the second banking directive passport, it seems to me that the EEA credit institution complies with conditions (a) and (c) in paragraph 3(1). Therefore, all that is necessary is to exclude paragraph (b).

As regards Amendment No. 128, firms which do have an EEA right cannot use it where they are dealing or giving advice by means of a remote communication from outside the member state where the customer or counter-party resides. This results from the guidance issued by the European Commission in June 1997 on the use of the second banking directive passport and probably also applies to the use of the investment services passport, although that is not entirely clear. The second banking directive passport applies only where both parties are within the same member state. The European Commission guidance states that, in these circumstances, the credit institution will not be in the member state where the customer or counter-party is. Therefore, the credit institution needs to rely on its rights to provide cross-border services directly under Article 49 of the Treaty of Rome.

I emphasise that the Commission's guidance results from lobbying by our own Treasury and the FSA and is the consequence of that which the UK wanted to see in place; that is to say, where a bank in the United Kingdom provides services by telephone, fax or screen from its United Kingdom branch to customers or counterparties in another member state, the regulator of the United Kingdom branch is the authority and not, as the Commission previously indicated would often be the case, the regulator in that member state.

I now turn to Amendment No. 131 which is to Schedule 4, page 235, line 15, and seeks to substitute the expression "permitted" for "regulated". Paragraph 5(1), Schedule 4, provides that a treaty firm must give the authority notice of its intention to carry on a regulated activity and it cannot carry on that regulated activity for the following seven days. I am concerned that this notification requirement and corresponding delay should only apply to the activities which the treaty firm is allowed to carry out under Schedule 4. However, the expression, "regulated activity" means all the activities which need authorisation. Therefore, as written, the notification and delay requirement applies to any activity for which the treaty firm obtains authorisation under Part IV.

I turn to Amendment No. 141 to Schedule 6, page 238, line 4, which leaves out the expression "an additional permission" and inserts "permission under Part IV". This amendment and the one that follows are

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drafting changes. Both amendments are intended, in effect, to clarify the references to "additional permission" in paragraph 7, Schedule 4. We believe it would be more accurate to refer to a permission under Part IV rather than an additional permission. I beg to move.

3.30 p.m.

Lord McIntosh of Haringey: We are all searching for the same or similar solutions on these amendments. I have a suggestion. Both the noble Lord and myself have folders. Let us take the bits out and shuffle them and see which bits come out on top.

Lord Kingsland: The noble Lord says that, and it is good to find him in such a jesting mood this afternoon. The fact is that the Opposition in another place tabled similar amendments at both Committee and Report stages in another place and did not get anything like the positive reaction that we now receive from the Minister. So it was well worth while tabling the amendments. I shall be delighted of course, in the constructive way in which the Minister is approaching the matter this afternoon, to talk to him about it at some time between now and Report stage.

Lord McIntosh of Haringey: Perhaps I had better make my full speech before giving the noble Lord, Lord Kingsland, too much encouragement.

Schedule 4 enables firms from other member states to exercise treaty rights to carry on regulated activities here. The government Amendment No. 129 concerns the interaction of EEA and treaty rights under the two schedules. Amendment No. 128, tabled and spoken to by the noble Lord, Lord Kingsland, may be intended to address the same point.

At present, paragraph 3(1)(c) of Schedule 4 rules out the use of that schedule to exercise a treaty right to carry on an activity which the person has an EEA right to carry on. It does not matter for these purposes whether the person is exercising or even intending to exercise their EEA right. The provision is necessary because it is an established principle underlying the passport directives that they provide the exclusive route for exercising the rights they cover.

Member states must ensure that the rights cannot be exercised by some parallel route that bypasses the notification procedures laid down in the directives. That is what paragraph 3(1)(c) does. However, the problem with paragraph 3(1)(c) as it stands is that it refers only to an EEA right to carry on "that activity", but makes no reference to the manner in which the firms may carry on the activity in question.

Following discussions in another place--I am sorry it appeared as though there was no response--we are persuaded that, although the circumstances may be unusual or rare, it is conceivable that, as a matter of Community law, the EEA right and the treaty right that the person proposes to exercise could be parallel rights to carry on the same activity by different means. Thus the person could have an EEA right to provide services by establishing a branch in another member

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state or providing services within the territory of another member state. They may or may not be exercising that right, or proposing to exercise that right. But that should not stop them also exercising a treaty right, if they have one, to carry on the activity in a way that is covered by the directive. An example might be if they were proposing to provide services to persons in the UK in a way which meant that they were not regarded, under the directives, as providing those services within the territory of the UK.

Amendment No. 129 narrows the exclusion in paragraph 3(1)(c) so that it only excludes treaty rights where the manner in which a regulated activity is to be carried on in exercise of the treaty right would be the same as that covered by an EEA right that the firm has. By introducing this concept of the manner in which a firm may have a right to carry on an activity, Amendment No. 129 resolves the problem, I hope to the satisfaction of the noble Lord, Lord Kingsland. On that basis, I hope that the noble Lord will not move his amendment and support ours.

Amendment No. 130 deals with the situation where a person from another EEA member state has permission to carry on activities under Part IV but then acquires or asserts a treaty right to carry on those activities. This might occur, for example, if the home state law is changed so that the activity then becomes regulated by the home state authority. Or the person may simply not have chosen to assert their treaty right before. The amendment provides that, when the treaty right is established, the relevant part of the person's existing Part IV permission is cancelled unless the authority has some good reason for maintaining the coverage of the Part IV permission.

I now turn to the opposition amendments. Amendments Nos. 126 and 128 would disapply for EEA banks the requirement under paragraph 3(1)(b) that for a firm to enjoy those treaty rights, their home state laws must afford equivalent protection to consumers, or must meet harmonised EEA standards if there are any in the area of activity concerned.

The need to be satisfied as to the protection offered by home state law or, where there is a Community instrument setting out minimum standards, that it has been implemented, is an important condition for recognising rights under the treaty. I am grateful to the noble Lord, Lord Kingsland, for his explanation. As he said, these amendments were tabled and discussed in another place, but at that time we were at a loss to understand the aim of the Opposition in tabling the amendments. However, we can still see no reason to suspend the requirements under paragraph 3(1)(b) for EEA credit institutions. Why should this group of institutions which already enjoys rights under the directive, be able to exercise rights that go beyond the treaty?

I turn to Amendment No. 131. I can understand the concern of the noble Lord, Lord Kingsland, that paragraph 5 might prohibit the treaty firm from carrying out any regulated activity in the seven-day period after it gives notice. That would be an unfortunate result if the regulated activity was

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something the firm had an additional Part IV permission for, or for which they enjoyed an exemption. We feel that they have a point but need to think about the solution. We are not convinced that changing "regulated" to "permitted" fully addresses the issue as it would still leave a treaty firm unable to exercise a Part IV permission. I shall be grateful if the noble Lord does not move the amendment and we will do our best to come up with a more complete solution.

Finally, I turn to Amendments Nos. 141 and 142 to paragraph 7 of Schedule 6, which deals with the application of the threshold conditions to treaty firms. I can see that the intention is simply to align this paragraph with the previous paragraph applying to EEA firms. We will consider further whether exact alignment is appropriate given the way in which EEA and treaty firms are dealt with under the Bill.

I hope that explanation deals with this rather complex and obstruse but nevertheless important issue.

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