Such is the complexity of the law in the UK applicable to US firms seeking to provide investment services to UK people, that writing a short but helpful summary of that maze of regulation is a considerable challenge.

The Financial Services and Markets Act 2000 (FSMA) governs most – but not all – investment businesses in the UK. For the most part, FSMA investment business does not include the simple provision of finance, which is unregulated (except for domestic mortgage lending). Some lending which is in the form of the provision of credit to individual consumers in amounts of £25k or less is regulated by the Consumer Credit Act 1974 (CCA) for which US firms, but not authorised European Union credit institutions, require a CCA licence. Foreign exchange and commodities (including precious metals such as gold and silver) are not regulated investments unless they are the subject of a derivatives contract.

FSMA regulation

The FSMA contains a general prohibition on the conduct of investment business in the UK unless conducted by a person authorised by the Financial Services Authority (FSA). The FSMA further contains a separate but closely related restriction on financial promotions and marketing in the UK unless the financial promotion is approved by an authorised person or satisfies certain exemption requirements. As will be evident from the following discussion, whether a US investment firm's services constitute an FSMA-regulated activity or whether it can market its services without contravening the FSMA financial promotion restriction is far from straightforward.

The statutory definition of conduct of investment business under the FSMA can be found in schedule 2 to that Act and a statutory order (FSMA 2000 (Regulated Activities) Order 2001 (97 articles and four schedules).

FSMA defines investments to include:

. securities (shares, debentures, bonds);

. deposits;

. derivatives (futures, options and contracts for differences);

. funds, unit trusts etc (any arrangement to participate in a collective investment scheme); and

. contracts of insurance. Investment business (or 'regulated activity') means the conduct of a business which involves:

. dealing in investments as principal or agent;

. arranging, or introducing people to, deals in investments;

. deposit taking;

. managing investments;

. advising on investments;

. safeguarding and administering investments; and

. establishing funds, unit trusts etc. The definition of regulated activity is subject to a number of exclusions such as buying or selling an investment as principal without holding oneself out to investors as conducting that business.

US financial promotions

Financial promotion communications are exempt from the FSMA restrictions if they are approved by an FSA-authorised person, or if they are made, to various specified classes of investor (such as sophisticated or high net worth investors) or meet specified conditions. The exemptions are set out in the FSMA 2000 (Financial Promotion) Order 2005 (with 74 articles and six schedules). Exempt communications may include, for example, generic promotions and one-off written communications (with broader exemptions for deposit taking and insurance business). The exemption conditions depend on whether the financial promotion is unsolicited or made by personal visit, telephone conversation or other means. If this were not complicated enough, the exemptions for financial promotions for funds, unit trusts etc (collective investment schemes) are governed by a similar but different statutory order (FSMA 2000 (Promotion of CIS) (Exemptions) Order 2001 with 30 articles and one schedule) which contains separate rules for 'regulated' collective investment schemes and those schemes that are 'unregulated'.

A different set of FSMA rules apply to the promotion of new securities issued by a body corporate: these are regulated under the FSMA prospectus rules. The offer of new securities to the public in the UK must be made by an FSA-approved prospectus. If the promotion of new securities is included in an approved prospectus, then the financial promotion rules do not apply. However, an approved prospectus is not required for offers to 'qualified investors' (broadly authorised people and professional/experienced investors); offers to fewer than 100 investors (other than qualified investors); or where the minimum consideration payable is at least €50,000 (£34,000). Where the offer is not included in an approved prospectus then one has to revert to the financial promotion rules which still apply.

Once the marketing rules have been negotiated, one has to consider the regulation of any resulting business.

US investment services

The FSMA regulation only applies to the conduct of investment business which occurs, or is with investors, in the territory of the UK. The proposition may sound simple in principle, but it is often difficult to apply in practice. The FSA will scrutinise investment business carried on over the internet or other telecommunications system closely and it is frequently unclear whether it will be designated as regulated activity. If a US life insurance company issues an insurance policy to a UK resident, the FSA does not consider that to be conducting investment business in the UK if the underwriting decisions were taken in the US. On the other hand, if a US stockbroker arranges for a UK resident to subscribe for shares in a US company then that will be treated as the conduct of investment business in the UK.

If the provision of investment services from the US does amount to the conduct of investment business in the UK, there is nonetheless a significant but involved exclusion in the Regulated Activities Order for people overseas on which US firms may be able to rely.

An overseas person means a person who provides investment services otherwise than from a permanent place of business maintained by him in the UK. The two principal exemptions are for:

. entering into a transaction or arranging transactions 'with or through' an authorised person; and

. entering into transactions as principal with, or giving investment advice to, a person in the UK, if the transaction is the result of a 'legitimate approach'. (The legitimate approach exemption for people overseas does not apply to managing, safeguarding or administering investments). A 'legitimate approach' means an approach made by the UK investor to the person overseas which has not been solicited by the overseas person in any way or has been solicited by the over-seas person in a way which does not contravene the FSMA financial promotion restriction; that is, in a way that falls within one of the applicable financial promotion exemptions noted above.

Any US firm seeking to provide investment services to UK residents, although regulated by the authorities in the US, nonetheless has to negotiate a maze of regulation to assess whether it is feasible to provide that service without FSA authorisation. A US firm may often conclude that it has no alternative but to obtain FSA authorisation which, in practice, will necessitate the establishment of a permanent place of business in the UK and the corresponding loss of cost savings and efficiencies which global electronic commerce and telecommunication systems can otherwise deliver.

Robert Falkner is a partner in the securities and financial services litigation group at Morgan Lewis.