FSA Internet guidance

It has taken some time for both the regulators and regulated firms to get to grips with the regulatory implications of the Internet. Whilst some ad hoc guidance has previously been given by the various SROs, this guidance is the first time that the FSA has contributed to the debate and explained the extent to which it intends to use its enforcement powers in relation to Internet business.

What is the problem with carrying on business on the internet?

Whenever material is placed on the Internet, it is accessible throughout the world. It is almost impossible to prevent persons outside the UK viewing material which is "published" on the Internet in the UK. This means that financial services business which is transacted over the Internet, or services which are advertised on the Internet, could potentially fall foul of overseas equivalents to the Financial Services Act.

Scope of the guidance

The guidance issued by the FSA relates to its interpretation of its powers in relation to overseas Internet business. However, the crucial consideration for UK authorised firms is how overseas regulators will view their UK based Internet business. Whilst the guidance does not give any indication of the FSA's opinion as to overseas regulators views, the FSA has indicated to Cameron McKenna that its view (which is explained below) is broadly held by the regulators of the major, financially developed states throughout the world.

The FSA's view

Under Section 57(1) of the Act, persons must be authorised to issue investment advertisements in the UK or have their contents approved by an authorised person. Section 207(3) of the Act explains the circumstances in which an investment advertisement will be "issued" in the UK. Bearing in mind the wording of this section, the FSA is of the opinion that much of the information on the Internet will have been "made available" to persons in the UK, and therefore will technically be in breach of Section 57(1) of the Act, which is a criminal offence, unless it is authorised.

However, the FSA has flexibility over when to use its enforcement powers, and if there are no "investor protection" issues in relation to the site, then the FSA has stated that it will be very unlikely to use those powers.

In taking enforcement decisions, each case will be judged on its merits but will take into account the following relevant factors:

• whether the Web site is located on a server outside the UK;
• the extent to which the investment was available to UK investors;
• the extent to which positive steps had been taken to limit access to the site ("ring fencing" the site);
• the extent to which positive steps had been taken to ensure that UK investors did not obtain the investment service ("ring fencing" the sales process); and
• the extent to which the advertisement was directed at persons in the UK.

Internet compliance

The key to avoiding scrutiny from the FSA is to "ring fence" the site and any sales process. This means restricting the extent to which persons can view the site and can actually deal in any of the investments which were being advertised or sold. For example, a site could:

• state that the services were only available in certain countries;
• state that information regarding the service or the documentation which needs to be completed to purchase the product will only be sent to addresses in that country; and
• send passwords to customers resident only in the target country in order that only they could access the site or any on-line purchasing capability which the site had.

It is important that each site is properly "mapped" in order to make maximum use of any ring fencing which has been used. For example, if any disclaimers or warnings that products are only available to persons in certain countries only appeared as the last of a series of screens, then it would be difficult to argue that the product provider was trying to discourage investors from viewing the site. In addition, if a viewer only had to "click here" to confirm that they were from a particular country, then it will be difficult to argue that reasonable steps had been taken to avoid the material being available to, or the product being sold to, non-residents.

Conclusion

The FSA's guidance is to be welcomed as an important step forward in keeping its guidance up-to-date with modern selling practices. However, it will be useful if the FSA would explain the extent to which it understands that foreign regulators agree with its view. In particular, a Memorandum of Understanding between the various regulators on this subject to explain that none of them are interested in sites based abroad provided that the site does not present any investor protection issues for them would be welcomed.