Financial Leaders support WTO Members' proposals for further liberalisation in financial services

21 September 2001

Financial Leaders support WTO Members’ proposals for further liberalisation in financial services

The Financial Leaders Group is comprised of private sector representatives from Canada, the European Union, Hong Kong, Japan, Switzerland and the United States. Its members welcome this opportunity to comment on the various negotiating proposals relating to financial services, which have been tabled in the WTO Council for Trade in Services (CTS). FLG members have compared the different elements of the negotiating proposals with the core principles, which the FLG drew up when it was established in 1996, and the more detailed objectives that it compiled at the beginning of the “GATS 2000” negotiations. These core principles and detailed objectives remain valid as we approach the market-opening phase of the current services negotiations.

Introductory Remarks

The Financial Leaders Group (FLG) has a deep commitment to the negotiations underway in the World Trade Organisation (WTO) to liberalise trade in financial services. It believes that a declaration of a broader Round of trade negotiations would help stimulate progress in the financial services talks.

Since December 2000, nine WTO members have tabled in the Council for Trade in Services negotiating proposals relating to the liberalisation of financial services. A number of these submissions highlight – rightly – the critical role that the financial services sector plays in developed and developing economies. In addition to the sector’s direct contribution to economic growth and employment, financial services have a special function in the economy, as the catalyst for or facilitator of other activities, while also supporting financial sector stability. Financial services firms mobilise and distribute savings; facilitate investment; enable reliable and efficient settlement of payments; provide means of risk management for business and; support and encourage external trade. Since the financial services sector is an important channel for the implementation of macroeconomic policies, an efficient and reliable financial services sector helps governments to balance their budgets and to keep down costs and prices. Deep and liquid financial markets also provide investors with more choices, lower cost investments and innovative products.

The liberalisation of financial services markets, through the reduction and elimination of restraints on foreign participation in financial services activities, both cross-border and via local presence, will enhance economic growth globally, regionally and for individual countries, both developed and developing.

Liberalisation will help provide developing countries with essential infrastructure to speed their modernisation; and through joint ventures and other collaboration will provide up-to-date systems and technology to strengthen their domestic financial service sector, while promoting best practices in such areas as risk management, compliance and corporate governance. Globally, it will enhance investor confidence; improve the health, safety and retirement security of working people; provide increased choice and opportunities for consumers with the broadest range of products and services at the lowest cost. Open, fair and transparent markets will attract and help retain private capital flows for long term investment. Competition in financial services is essential for the development of modern, efficient, well-regulated financial markets.

The 1997 Financial Services Agreement

FLG members share the view of those WTO Members, who have said that, while the 1997 financial services agreement was an important step forward in achieving trade liberalisation and market access in financial services, it was only the start of the liberalisation process for financial services in the WTO. The ratification and entry into force, at all government levels, of the 1997 agreement, so as to secure the benefits of the agreement, is of utmost importance. Any signatory country that has yet to do so should ratify and implement the Agreement without any further delay. Monitoring WTO Members' implementation of the 1997 agreement remains an important continuing effort.

Improved Commitments

The 1997 agreement established a good foundation upon which WTO Members can make further liberalisation commitments, on an MFN basis, to provide real market access and to put foreign financial services firms on an equal footing with their domestic counterparts. This will benefit their economies and enhance global growth. Of the 142 WTO Members, well over 100 have made commitments in financial services. Those who have not should be encouraged to do so. In addition, more countries should be prepared to use the GATS Understanding on Commitments in Financial Services as the basis for their commitments. In overall terms, for the financial services sector, the goal of open and competitive markets will be achieved only if all WTO members make substantially improved commitments

Given the benefits of further liberalisation, WTO Members should ensure that financial services are an integral part of the market-opening phase of the current WTO services negotiations. During these negotiations, WTO Members should make commitments which go beyond the binding of existing regimes (standstills) to achieve the real reduction of barriers to trade and investment.

Exceptions to GATS commitments should be precise, transparent, temporary and limited to the minimum required for specific purposes. Remaining impediments to substantially full market access and national treatment should be liberalised progressively on the basis of an agreed transition schedule. The length of the phase-in periods will vary country by country. Generally, however, phased commitments should have a duration of no longer than 3-5 years. No new restrictions may be created.

Domestic Regulation

Because financial services are so central to the economy, governments and monetary authorities subject them to supervisory regimes, intended to protect consumers, depositors, investors and policy-holders and to preserve the stability of the financial system. This practice is reflected in the GATS annex on financial services, which allows countries to take measures for prudential reasons, provided they are consistent with their MFN and non-discrimination obligations. Regulation, therefore, should not be used to discriminate against foreign suppliers nor to hinder competitive opportunities.

It is important for WTO members to recognise that every service sector has unique features that may require a different mix of GATS principles in their commitments. This is especially true with respect to regulated service sectors like financial services, since various financial service sectors offer different products and are subject to different regulatory systems. In past WTO financial services negotiations, the primary focus was on market access and national treatment; and additional commitments in those areas are still necessary. However, in order to ensure that market access and national treatment commitments achieve their promised objectives, there is now a pressing need to supplement them with new commitments on improved transparency and, in addition, domestic regulatory reform as necessary and appropriate for each specific sector.

The liberalisation process has to be matched by sound regulation that provides a framework for competition. Developing countries must manage the liberalisation process at a speed that suits their social and cultural backgrounds whilst at the same time committing themselves to the liberalisation process. Change brought about by liberalisation, when managed through regulatory processes based on transparency and non-discrimination principles, will reinforce economic and financial capacity for increased domestic and inward investment. Again, any phased commitments should have a duration of no longer than 3-5 years.

Specific Objectives

The financial services negotiations should reflect the following goals:

Foreign investors should have the right to establish through a wholly owned presence or other form of business ownership, and to operate competitively through established vehicles available to national businesses. Thus, limits to investment in joint ventures and domestic financial institutions should be lifted and fully-owned subsidiaries, branches and representative offices should be allowed for foreign financial services providers. In addition, arbitrary “economic needs tests” and restrictions on regional and product-specific activity should be abolished.

Foreign direct investors should have the same access to domestic and international markets as domestic companies. They should be treated for regulatory and other purposes on the same basis as domestic companies.

Unnecessary restrictions on cross-border financial services business and consumption of services abroad should be removed, to encourage trade without requiring establishment, particularly taking account of technological advancement, including electronic commerce.

The temporary posting of key business personnel should be facilitated by the creation of a system of easily obtained and renewable permits.

Existing investments should be grandfathered by Member countries that did not commit to do so in the 1997 Agreement.

Countries wishing to accede to membership in the WTO should do so on the basis of commitments to substantial financial liberalisation consistent with the 1997 Financial Services Agreement and the goals set forth above, resulting in commercially meaningful access.

In order to ensure that market access and national treatment commitments achieve their promised objectives, there is a pressing need to supplement them with new commitments on improved transparency and, in addition, domestic regulatory reform as necessary and appropriate for each specific sector.

Transparent domestic rules and administrative procedures are an essential part of liberalising financial services. Clear and reliable information about a country's financial services laws and practices promotes equitable trade and competition. Regulatory regimes, even restrictive ones, should be made more transparent. This is an obligation on all WTO Members, whether they make specific commitments or not.

To encourage private savings for retirement, in recognition of worldwide ageing populations, WTO Members should commit to lock in and improve market access in the provision of pension and asset management products and services.

The dissemination and processing of financial information to provide clients with competitive services necessary for the conduct of ordinary business should be permitted.