GATS & Financial Services

GATS Services Commitments

Most WTO Member States submitted Schedules of Commitments in relation to services pursuant to GATS.The schedules are required to be classified in accordance with 12 principal sectors. States are not obliged to make a commitment in respect of each sector.

The principal sectors are

  • business services
  • advertising, market research,
  • consulting,
  • computing,
  • communication;
  • professional services (accounting, architecture, engineering,_
  • audio visual services;
  • construction;
  • distribution (wholesale and retail trade and franchising);
  • health service;
  • tourism;
  • some financial services

GATS & Financial Services

The general principles of GATS apply to financial services. States agree initially to provide a  list of sectors they are committing to and in respect of which they may grant market access and national treatment including the financial services sectors and sub-sectors.

They may then set out the terms and limits on market access and conditions for qualification in the sectors concerned. States may provide a negative list giving limits on commitments for general means of supply. They may thereafter furnish a negative list setting out limitations on commitments with reference to the means of supply.

In accordance with the general provision of GATS, states may derogate from the most-favoured-nation principle, if it listed the measure concerned is in its exemption schedule.

Most of the leading industrial states committed themselves to increased market access to particular sectors in their territories including, in particular, financial services. They provided commitments on financial services during the Uruguay Round, which became operable when the Agreement on Financial Services was finalised. Ultimately over 70 WTO members, including the EU and US have adhered to the Agreement.

The Understanding on Commitments on Financial Services expands on GATS. It prohibits measures that prevents the cross-border transfer of data as is necessary for  in the course of business concerned.The state parties agree to endeavour to remove or limit any significant adverse effects of measures which prevent foreign suppliers offering the full range of financial services. This also applies to other measures that affect adversely the ability of financial service suppliers of any other member to operate compete in or enter the members’ market

The Commitments and undertakings agreed in principle to endeavor to eliminate monopoly rights, grant most-favored-nation treatment in procurement, grant financial services providers of other states (whether or not parties to the understanding) the right to establish a commercial presence and allow foreign financial service suppliers to offer any new financial service. It was agreed in principle that nonconforming measures were to be only those existing upon commencement.

Further Disciplines

In relation to qualifications requirements, licensing and technical standards, the Council for Trade in Services is to develop new disciplines under GATS. They are to be  based on objective and transparent criteria and not be more burdensome than necessary to ensure the quality of the requisite services. They must not amount to a restriction on the supply of services.

Very limited disciplines only have been developed. Pending this, WTO members may not apply licensing and qualification requirements in the sectors in which commitments have been made, unless they comply with the above criteria or if they could not reasonably have been expected to be made by the member at the time the specific commitments were made in the sectors concerned.

Basic Principles

The basic principle of GATS is that its members are to accord services and service suppliers of other members, treatment no less favourable than that provided for under the terms limitations and conditions agreed in the schedule.

Where market access commitments are made, the member shall not maintain or adopt certain measures including

  • limits on the number of service suppliers
  • limits on the total value of assets or transactions
  • limits on the number of service operations
  • limits on the total quantity of service outputs
  • limits on the number of persons who may be employed
  • limits on foreign capital

GATS requires that measures of general application affecting trade and financial services must be administered in a reasonable objective and impartial manner. This applies in the sectors where specific commitments are undertaken.

There must be judicial or administrative procedures for the review of decisions affecting trade in services. There are requirements for communication of decisions regarding authorisations.

Financial Services Commitments

GATS include specific and general commitments. Market access and national treatment are specific and accordingly apply in financial services only where a commitment has been made in the relevant schedule.

There was an Understanding on Commitments in Financial Services drafted subsequent to the Uruguay Round to incentivise improved mutual commitments. It defined basic arrangements for market access and  national treatment in  financial services together with other commitments not included in the General Agreement but of relevance to the financial sectors.

Several states noted in their schedules that they would undertake commitments in accordance with the Understanding on Commitments in Financial Services.

States provided a list of sectors for which they commit to grant market access and national treatment in accordance with their schedules. They set out the terms, limits and conditions of access and conditions and qualifications for national treatment and provide for the sectors to which they apply. This may include subsectors.

Schedules by Member States may provide horizontal commitments that apply across sectors and business sectors. They may set out conditions/reservations. States may furnish a negative list setting limits on the commitments referenced, which may refer to the mode of supply. Exemptions from the most-favoured-nation principle may apply under the schedules.

States list exemptions in their Financial Services Agreement Schedules. The exemptions and limitations are subject to further negotiation in later rounds. Member States Schedules may include horizontal commitments which apply across sectors in industries. They are to be listed in the schedules on each state’s part for the purpose of clarity.

Equivalence Recognition

GATS  contemplates that a WTO member may recognise the education or experience obtained, requirements met, licenses or certifications granted in a particular country for the purpose of authorising financial service suppliers to undertake business in its country. This may be based on an agreement or arrangement with the other country or may be granted automatically.

States shall not accord recognition in a manner which would constitute a means of discrimination between countries in the application of the standards or criteria for authorisation licensing or certification of service suppliers or a disguised restriction on trade in services.

Where recognition is granted, states must afford adequate opportunity for other members to negotiate access to an agreement or arrangement or negotiate compatible arrangements.

The GATS agreement provides that members should where appropriate afford recognition on the basis of multilaterally agreed criteria. GATS provides that members may recognise prudential measures of other states in determining how its own regulatory and other requirements are applied.

This can be pursuant to agreements or unilaterally. The recognition of prudential measures is not subject to the non-discrimination non-disguised restriction provisions.

Members must afford adequate opportunity to other members to negotiate similar arrangements under circumstances in which there would be equivalent regulation oversight implementation and procedures concerning the sharing of information.

All measures of general application affecting trade in services must be administered in a reasonable objective and impartial fashion.

Limits

The commitments are subject to exceptions;

  • policy necessary to protect
  • public order and morals
  • compliance with WTO consistent laws
  • prevention of fraud
  • protection of privacy

They must be necessary to achieve the objective. The measures must not be a  disguised arbitrary or unjustifiable discrimination or restriction on trade in services.

The prudential exception is important. It provides that notwithstanding any other provisions of the agreement on  financial services a member is not to be prevented from undertaking policies or prudential reasons including

  • for the protection of investors, depositors, policyholders or other persons to whom a fiduciary duty is owed by financial service suppliers or
  • to ensure the integrity and stability of the financial system.

They shall not be used as a means of avoiding the members commitments are obligations under the agreement.

EU Financial Services Commitments

There are complex issues surrounding the interpretation of the EU schedules in the area of GATS and financial services. Reversion to WTO GATS rules would mean greatly reduced access for the EU financial services markets for  UK institutions in the EU and EU institutions in the UK.

 The EU commitments have been amended and updated  since 1997 to accommodate the accession of new member states who had made separate commitments This necessitated compensatory adjustments with other WTO members in some cases.

By 2006, the EUs consolidated schedule was published and accepted by the Council for Trade in Services. However, some member states have not yet ratified the agreement so that is not yet in force. The position has been further complicated by the accession of Romania Bulgaria and Croatia in 2007 and 2013 respectively.

Brexit will ultimately require a new consolidated schedule. The EU has proceeded on the basis that the 2006 consolidated schedules apply.

EU Modes of Supply Commitments

Most EU states (excludes some of those who later acceded to the EU) have made limited commitments to incoming cross-border suppliers of  financial services(Mode One).  They principally cover insurance services and ancillary services such as credit reference investment research and advice.

In the case of the provision of services in the third state to a consumer within the EU (Mode Two) there are greater commitments. Each state is to allow its residents to purchase in the territory of another state the same range of insurance and ancillary services as allowed above (under Mode One). It also covers  banking and other financial services to some extent. The commitments are in much more comprehensive terms but is still  subject to exclusions for specific measures which reduce their effectiveness

Commitments in respect of the supply of financial services by a non-EU supplier through a commercial presence (Mode Three) are more comprehensive. Each member grants financial service suppliers of the other member the right to establish or expand within its territory, including through the acquisition of existing enterprises, a commercial presence. This includes a branch or other establishment.  There are a number of qualifications in the schedule such that it does not undermine the basic EU prudential requirements for branches and subsidiaries of third parties

The commitments for the movement of natural persons from the third country into the EU (Mode Four) supplying financial services are more limited. There are commitments in relation to the movement of senior management, IT and telecommunications specialists lawyers and actuaries. They are largely limited to temporary movements in the context of a commercial presence. They do not comprise general free movement measures.