B. Mutual recognition, preferential trade agreements, or requiring establishment: How to ensure effective financial market supervision?

In the absence of an incorporation of, or reference to, multilateral regulatory legal standards for financial services in the WTO systems, Members might take recourse to other measures. One way seems to be a trend towards requiring establishment for service suppliers who want to supply their services either through commercial presence or the presence of natural persons (GATS Modes 3 and 4).[1] This submits foreign service suppliers to the regulatory standards of the host Member and excludes the operation of subsidiaries which would remain under the supervision of the home Member. Such requirements are restrictions on market access (GATS Article XVI:2(e)) and may also be violations of the national treatment principle. They will hence only be compatible with the GATS if there are no conflicting commitments. In general, however, such restrictions run against the commitment of market access and non-discrimination. They defy the very idea of cross-border services. Much as in the internal market law of the European Union, ways of combining cross-border trade and oversight need to be developed.[2]

How could countries move forward and combine strict regulatory supervision with giving full market access? One way would be the conclusion of preferential agreements which combine high regulatory standards with preferential market access rights.[3] In such a case, countries could accept financial services suppliers who remain subject to their home regulation because the parties to the agreement are satisfied that they all employ similar regulatory standards. This can be achieved through regional integration agreements as the example of the European Union has shown. However, it is not possible to conclude preferential agreements which cover financial services only for these purposes, because GATS Article V requires that economic integration agreements have substantial sectoral coverage. This excludes preferential agreements which are limited to the financial sector, e.g. by covering only insurance and banking.

As an alternative, Members could enter into mutual recognition agreements on the basis of GATS Article VII:2 and, specifically, paragraph 3 of the Annex on Financial Services. However, it is questionable whether WTO Members can combine this with conditional market access commitments limited to the Members of such an agreement. In the absence of any GATS Article II exemptions, a conditional commitment could violate the MFN principle. Furthermore, Article VII:3 specifically requires that mutual recognition not be a means of discrimination between Members. Some Members have made commitments based on the condition of concluding a mutual recognition agreement. Yet, even if such a limitation would be considered to be compatible with the GATS MFN principle, it could be a violation of the market access principle. According to Articles XVI:2 and XX:1, a Member may only list those measures as exemptions which are specifically mentioned in either of these provisions.[4] It therefore seems that this option might run against GATS principles.

This shows that the application of the non-discrimination principles may hamper efforts of Members to combine tight regulatory standards and supervision with market access commitments which allow for home-country Member control. As a consequence, the abovementioned attempts to incorporate regulatory standards into the schedules may be more compatible with the trading system.

  • [1] GATS Article I:2(c) and (d).
  • [2] ECJ, Case C-205/84, European Commission v Federal Republic of Germany (1986).
  • [3] See Dietrich et al, above n 34.
  • [4] Panel Report, Mexico—Telecoms, above n 39, para 7.353 ff.
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