Slide 4 of 9
Internet Regulation Based on Establishment
All regulators claim jurisdiction over financial organisations established in their jurisdiction. In the physical world, the concept of establishment presents few problems. When a branch of the institution appears in another country, that amounts to establishment. However, in the Internet context there is a possibility of holding that the presence of the institution’s website on a customer’s own PC is a presence in that country, in other words, that the customer’s PC becomes a temporary virtual branch.
Within the European Union, this issue has needed to be examined in the context of the Second Banking Directive (Directive 89/646/EEC, 1989 OJ L 386/1) which provides for a “single European passport” for banks established in a Member State. Both the Commission’s Interpretative Communication and the recent electronic commerce directive have taken the position that establishment requires the presence of both premises and staff, in both cases used for effecting transactions with customers. The mere presence of communications facilities does not amount to establishment, even if staff are present to service them. Thus even a wholly-owned ATM network is not an establishment.
In the long run the “virtual branch” approach has to be rejected, because its consequence is that the financial institution is established in every jurisdiction where its website is accessed, i.e pretty much every jurisdiction in the world.