'. Part III of Schedule 3 makes provision in relation to the exercise outside the United Kingdom of EEA rights by UK firms.'.—[Mr. Timms.]

Brought up, and read the First time.

I beg to move, That the Clause be read a Second time.

Mr. Deputy Speaker:

With this it will be convenient to discuss the following: Government amendments Nos. 70 to 72, 83, 113, 114 and 158.

Amendment No. 39, in schedule 3, page 208, line 34, after "Kingdom", insert— for the purpose of carrying on the activities in question". Amendment No. 40, in page 209, line 20, after "Kingdom", insert— by carrying on the activities in question". Amendment No. 41, in page 209, line 22, after "notice", insert— of the firm's intention to provide services in the United Kingdom by carrying on the activities in question.". Amendment No. 42, in page 209, line 28, after "Kingdom", insert— by carrying on the activities in question. Government amendments Nos. 159 to 170.

Amendment No. 43, in schedule 4, page 212, line 41, at end insert— "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):". Amendment No. 44, in page 213, line 13, at beginning insert— except where the firm is an EEA credit institution.". Amendment No. 47, in page 213, line 19, after "right", insert— or, where carrying on the activity constitutes the provision of services in the United Kingdom, cannot use an EEA right,". Amendment No. 48, in page 213, line 19, after "activity", insert— or, where carrying on the activity constitutes the provision of services in the United Kingdom, the firm is carrying on that activity from outside the United Kingdom.". Amendment No. 45, in page 213, line 30, after "activity", insert— which is a regulated activity". Amendment No. 46, in page 213, line 36, after "on", insert— a permitted activity which is".

The Government amendments clarify the distinction in schedule 3 between European firms that use the single market directives to exercise passport rights under the directives in the United Kingdom, and UK firms that exercise passport rights in other European states. Part II of schedule 3 deals with incoming firms, while part III deals with outgoing UK firms. Clause 31 deals with incoming firms, but does not distinguish between incoming and outgoing firms. Amendments Nos. 70 to 72 would limit its scope to incoming firms. New clause 6 would then introduce part III of schedule 3, to deal with outgoing UK firms.

Amendments Nos. 158 to 163 make further drafting changes to the arrangements for incoming firms under part II of schedule 3. Amendments Nos. 164 to 170 do the same for outgoing firms under part III of schedule 3.

Amendments Nos. 39 to 42 make some interesting drafting suggestions in relation to the exercise of passport rights by European Economic Area firms. Part II of schedule 3 sets out two sets of conditions for EEA firms seeking to exercise their single market passport rights in the United Kingdom. Firms seeking to establish a UK branch in the exercise of those rights will qualify for authorisation if they satisfy the establishment conditions, which involve the receipt by the FSA of a consent notice from the firm's home-systate regulator.

The purpose of the amendments appears to be to make it clear that the activities identified in the notices—the permitted activities—must be activities that the EEA firm proposes to carry on through its branch, or by way of provision of services. It seems clear that the notices will relate to the carrying on of the activities identified in them, but, if there is any doubt in the minds of Opposition Members—I imagine that there must be because of the amendments that they have tabled—I will be happy to put on the record an assurance that that is the intended effect of the provisions. I hope that hon. Members will derive some comfort from that.

Amendments Nos. 43 and 44 would disapply the requirement that the home-state Laws afforded equivalent protection if the firm seeking to exercise a treaty right was an EEA credit institution carrying on investment services under a banking authorisation. The need to be satisfied as to the protection offered by home-state law where there is no Community instrument setting minimum standards is an important condition for recognising rights under the treaty. I see no reason to suspend that requirement.

Amendments Nos. 45 and 46 deal with drafting points. It is clear from schedule 4(3)(1)(a) of the schedule that a "permitted activity" must be a regulated activity, so it is not necessary to specify in either paragraph 4(1) or paragraph 5(1) a permitted activity which is a regulated activity". Opposition Members may want to comment on that.

I appreciate Opposition Members' thinking on amendments Nos. 47 and 48, which seem to provide alternative solutions to the same problem. The problem stems from the possible difference between what would fall to be regulated business carried on in the UK—the general perimeter test—and what would be carried on within the UK: the test that applies in the directives.

The Opposition have a point there, but although they have proposed two ways of dealing with the question, we do not think that either of them is entirely satisfactory. We are, however, pursuing the point—which is entirely valid, and dealt with in both amendments—with the draftsman. We intend to return to it in Another place as soon as we can.

I am grateful to the Opposition for drawing the matter to our attention and hope that, on the basis of that assurance, they feel that they do not need to press amendments Nos. 47 and 48.

There is a nice irony in the fact that, in Committee, it was the official Opposition who pressed hard to get these parts of the Bill right. If I were impolite, I might point out that the Government—who are so keen to join the euro quickly—were running the risk of not getting them right, thereby causing substantial problems in achieving their objective.

The Opposition's objectives are twofold. First, it is crucial to British interests, and to the interests of the rest of Europe, to realise that, if Britain damages passporting, reciprocal action will be taken against us elsewhere.

Secondly—in the spirit of healthy free trade—we want the single market to work. We want European Union passporting to be as streamlined and efficient as possible for European Union businesses and for elements of the financial services industry that come to the United Kingdom.

We are reasonably happy with the Government's new Clause and amendments in this group, although we still do not think—as I shall explain in some detail—that they completely deal with the points at issue. As the Minister will be aware, there have been discussions between learned lawyers—the details of which I confess I do not always understand. I appreciated the hon. Gentleman's comment that the discussions are not necessarily complete but will be finalised when the Bill is considered in Committee in Another place.

The Opposition note and are pleased that Government Amendment No. 112 has not been selected, as it was the one Government amendment in this group that we felt was not at all satisfactory.

Our amendments Nos. 39 to 42 are intended to limit the notices that are required as part of the procedures used in exercising the passport to notices relating to activities covered by the passport. As the Minister said, such an effect is obviously intended, but is not expressly stated in the relevant paragraphs.

Our amendments Nos. 43 and 44 would amend schedule 4 and are aimed at providing an investment services directive passport to incoming EEA banks entitled to use the second banking directive passport—which, although it may sound strange, is currently allowed by European Union law. Unless the two amendments are agreed to, however, it will no longer allow it—consequently worsening the current position of incoming EEA banks. The Opposition cannot imagine that the Government desire such an outcome.

If we want to allow United Kingdom banks to have the same "extra" ISD passport, we would surely be shooting ourselves in the foot by stopping non-United Kingdom EEA banks enjoying a passport to which they are currently entitled—albeit not under the ISD as such but because of the current United Kingdom concession.

As Ministers will be aware, schedule 4 gives treaty rights to all EEA nationals. The treaty right is a right to establish a branch in another member state or to provide cross-border services into it, provided that the conditions in paragraph 3 are satisfied. The treaty of Rome gives those rights, and schedule 4 implements them subject only to the satisfaction of the conditions stated in paragraph (3).

7.45 pm

Banks that are to be given the United Kingdom ISD passport are authorised in the home member state, and the second banking directive—2BCD——does not cover all of the ISD passported activities, which means that there is no EEA right covering them. Consequently, that satisfies the two other conditions in paragraph 3, and means that, in principle, EEA credit institutions are automatically given the ISD passport for those activities that are outside the 2BCD passport. The key examples are the receipt and transmission of customer orders and the arranging of transactions in existing securities, neither of which is covered in the 2BCD passport.

Our amendments Nos. 43 and 44 ensure that the freedoms that the United Kingdom currently gives will be continued. We also hope that the provisions will persuade other EEA member states to allow an equivalent ISD passport to United Kingdom banks.

Do the Government plan to remove that which is already enjoyed in the United Kingdom, or were the omissions simply an oversight?

Our amendments Nos. 47 and 48 relate to paragraph 3(1) of schedule 4, which sets out a key condition for the exercise of treaty rights. In July 1997, the Commission gave guidance to the effect that the 2BCD passport cannot be used when the bank is carrying on the relevant passported activity from outside the client state, typically by telephone, fax or screen. In this case, the "host" member state is the member state in which the branch is located and not the client state. Accordingly, a bank entitled to the 2BCD passport cannot use its passport. If paragraph 3(1)(c) is not amended as we are suggesting, the bank will also be excluded from the treaty rights, because it has an EEA right to carry on the activity, albeit that it cannot use it in those circumstances.

Surely it would be foolish if the schedule 4 treaty rights could be used by all firms authorised by their home member state to carry on the regulated activity except when the firm has an ISD or 2BCD passport. We are sure that that is not the Government's intention, and our two amendments will allow 2BCD firms to use the treaty right.

Our amendment No. 45 is designed to make it clear that the permission given by schedule 4 is only for passported activities, which will require authorisation under the Bill.

Amendment No. 46 is vital. Unless it is accepted, paragraph 5 will prohibit the treaty firm from carrying on any regulated activity until seven days after it gives notice, even if the regulated activity has absolutely nothing to do with the passport. That is neither acceptable, nor, I think, intended.

As I said, the amendments deal with a highly technical subject. A few moments ago, the Minister said that the Government want to continue examining the matter and to ensure that they have the provisions right. I apologise to the House for explaining in detail what we regard as the key issues, but—after all the effort that has gone into examining the issues in the past six months—please, may we ensure that we get it right?

I will gladly reflect on the points that the hon. Gentleman has made, but what I said at the beginning of this short debate stands. I was not entirely clear whether the hon. Gentleman wished to press the amendments. I hope that he does not.

I am grateful for the opportunity to make a short and entirely technical speech on these extremely important amendments. This has been a fascinating occasion, in which it would be correct to say that Flight has been speaking to Timms, but that Abrams and Slater probably have been communicating with Stokes. I think that all those involved should be congratulated.

Question put and agreed to.

Clause read a Second Time, and added to the Bill.