Setting up a representative office is a popular first step for Indian businesses looking to enter the UK market. Among a host of issues to bear in mind, one critical area relates to the planned business activities of the office and whether they will fall within the Financial Services and Markets Act 2000 (FSMA) and be subject to the regulatory authority of the Financial Conduct Authority (FCA), which regulates the UK’s financial services industry.
When thinking of a move into the UK, here are some important steps to consider:
(1) Any person, including an individual, corporate entity or partnership, that carries out a regulated activity by way of business in the UK must be authorized by the FCA. It is a criminal offence to operate without the appropriate authorization and if caught it could mean up to two years in prison as well as possible costly fines. Also, contracts entered into in breach of this prohibition may be unenforceable.
(2) Businesses first need to consider whether the proposed representative office would be acting “by way of business” and if so, whether it would be doing so in the UK.
The FCA’s general criteria for determining whether an activity is being carried out by way of business include: (a) the degree of continuity; (b) the existence of a commercial element; (c) the scale of the activity; (d) the proportion that the activity bears in relation to non-regulated activities carried on by the same person. More specific guidance can be found in the FSMA (Carrying on Regulated Activities by Way of Business) Order 2001.
Identifying whether an activity is being carried out in the UK is normally straightforward, particularly if the activity is clearly being carried out by a representative office in the UK. Further consideration would be needed if any potentially regulated activities originate from the Indian organization.
(3) Businesses should consider whether the representative office will conduct regulated activities. The FSMA (Regulated Activities) Order 2001 (as amended) lists many activities which, if carried out in conjunction with specific investments, would be regulated activities. For example, arranging for a person to enter into an insurance contract would be a regulated activity, as would advising a person on the purchase of shares, and so would entering into a regulated mortgage contract as lender.
(4) If a regulated activity is to be carried out, the business should identify any exclusions that might be available. For example, making arrangements for a person to buy a bond would not be a regulated activity if the transaction is to be entered into with or through an FCA-authorized person, provided certain conditions are met.
Another example is the overseas person exclusion, which is often relied on when an arrangement contains a cross-border element. The definition of an overseas person is someone who does not carry out any regulated activities, or offer to do so, from a permanent place of business maintained by them in the UK.
(5) Even if a business is satisfied that the intended activities of the representative office would not need authorization from the FCA, ongoing monitoring is required, particularly if the activities of the office change in any way.
(6) The issue of financial promotions is distinct from whether a representative office is carrying out a regulated activity. The FSMA states that a person must not communicate an invitation or inducement to engage in investment activity unless they are an authorized person. The communication must also be approved by an authorized person, unless it is covered by an exemption. It is a criminal offence for an unauthorized person to breach this restriction.
The FCA will find there is an invitation or inducement if: (a) there is an intention to persuade or incite the recipient to engage in investment activity; and (b) the action is promotional in nature.
Territorially, the general view is that any promotion with a UK link will be caught. If the communicator and recipient of a financial promotion are both based in the UK then the promotion would appear to be caught.
(7) Finally, businesses should identify whether they will need to get approval to operate in the UK from an Indian regulator, for example, the Insurance Regulatory and Development Authority or the Reserve Bank of India.
Indian businesses need to make sure that they know about all the issues when looking to set up a representative office in the UK. A key issue is to decide whether authorization would be required from the FCA for the activities of the representative office. Not getting authorization could lead to costly fines and damage one’s business reputation and future relationship with the FCA.
Richard McBride is a partner and Dominic Gilmore is an associate at TLT.
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