Again there are two proposals, one from the EU and Trinidad, and a more extensive version from the US. Both require prior consultation on proposed new regulation 'to the extent practicable' with 'all interested persons' or, for the US more explicitly 'interested persons and [state] parties'.
In addition to ensuring they have a reasonable opportunity to comment, the US says the final decision should, to the extent practicable, address in writing the substantive comments from interested persons on the proposed regulations. Equally, where an application from a financial service supplier to supply a financial service has been declined, they should be informed of the reasons.
This may sound pretty reasonable until it is put in context. Recall how capture of the regulatory, supervisory, and other public oversight agencies by the finance industry contributed to the GFC. 19 The risk-based model of financial regulation and the Basel II standards for prudential regulation of banks allowed the industry itself to become the front line regulators. The resources and capacity of regulatory agencies were depleted, as was their knowledge and confidence to engage in active regulation.
The US also wants all financial regulation to be administered in a 'reasonable, objective and impartial manner'. But they are highly subjective criteria and provide fertile grounds for contest and if necessary a dispute.
Transparency needs to be seen as part of a broader spectrum of industry influence. Pressure on regulations by deluging them with arguments and studies, and demanding explanations, is reinforced by requests for consultations from their patron states and if necessary threats of a dispute. The aim is to 'chill' or stifle the regulator. If the intervention is considered necessary and important enough, the industry can push its patron state to bring a dispute.
Giving more power to the industry will make it very difficult to restore more direct regulation, including for precautionary reasons. That is why the industry wants these provisions. The avenues through which they or their parent states will be able to exercise leverage is not clear, but TISA is likely to provide peer review by other parties and a mechanism for them to request consultations, as well as the enforcement mechanisms.
Prudential Measures (Art X.17)This is a standard provision in financial services agreements. Defenders of the GATS financial services agreement and advocates of TISA describe it as a carveout that protects governments' ability to regulate for prudential reasons. But it doesn't. It is only a weak defence that a government can argue if it is subject to a dispute. There are many practical problems with discharging the burden of proof.
More problematically, the article is comprised of two sentences that contradict each other. If a government takes a prudential measure that is inconsistent with the agreement, it cannot do so as a means to avoid its commitments under the agreement! So any prudential measures must be consistent with the other provisions in the agreement.
The TISA negotiations were an opportunity to revise this exception and provide a meaningful protection for the right of governments to regulate for precautionary and remedial reasons. Instead, TISA extends countries' exposure to the rules and then repeats the same impossibly circular language.
Harmonising financial regulationThe US and EU appear to be in dispute about the extent to which financial regulation should be harmonised. The EU, supported by the Trans-Atlantic finance industry, wants a harmonised system. That would pull back some of the post-GFC regulatory changes in the US, such as the new requirements and restrictions on the finance industry under the Dodd-Franks Act (formally the Dodd-Franks Wall Street Reform and Consumer Protection Act).
The services offer from the EU in its negotiations with the US for the Trans-Atlantic Trade and Investment Agreement (TTIP) was leaked this week. The explanatory note from the European Commission says:
The draft TTIP offer does not contain any commitments on financial services. This reflects the view that there should be close parallelism in the negotiations on market access and regulatory aspects of financial services. Given the firm US opposition to include regulatory cooperation on financial services in TTIP it is considered appropriate not to include any commitments on financial services in the EU's market access offer at this stage. This situation may change in the future if the US show willingness to engage solidly on regulatory cooperation in financial services in TTIP. 20
In other words, the EU is playing hardball in TTIP to force the hand of the US. Whatever ends up in TTIP is also likely to end up in TISA.
Extracts of demands from the US IndustryUS Securities Industry and Financial Markets Association 21
- Suppliers should be able to choose their corporate form (e.g., a 100%-owned subsidiary, a branch or a joint venture) and be treated no less favorably than domestic suppliers (i.e., national treatment).
- Other measures, such as the protection of cross-border data flows and transfers, and the inclusion of investor-state dispute settlement commitments, the ability to store and process data from a central regional location, rather than establishing a local facility is essential.
- Buying and selling financial products across borders, participating in and structuring transactions, and providing investment advice, without establishing a commercial presence and without being subject to separate licensing and approval requirements that generally apply to firms commercially present in a market.
- Permit consumers traveling outside their territories to utilize any capital markets related service in the other Party's jurisdiction
- Agree not to adopt or maintain measures that prevent or restrict transfers of information or the processing of financial information, including transfers of data by electronic means, or that prevent transfers of equipment, where such transfers of information, processing of financial information, or transfers of equipment are necessary for the conduct of the ordinary business of a financial service supplier.
- Each Party should permit temporary entry into their territories for persons who supply capital markets-related services to work with clients or to staff a commercial presence.
- At a minimum ensure that commitments in any comprehensive trade and investment agreement reflect the level of market access afforded under their domestic laws.
- The competitiveness of financial services firms depends on their ability to innovate, often rapidly in order to meet the special needs of customers by developing and offering new products and services. Ensure that regulators allow private firms to meet these needs, while maintaining appropriate prudential supervision.
- Regulators should: (i) propose regulations in draft form and provide interested parties the opportunity to comment on such draft regulations, where practicable; (ii) make publicly available the requirements that suppliers must meet in order to supply a service; and (iii) enforce laws and regulations on a non-discriminatory basis, according to fair and transparent criteria.
- A strong investment chapter that applies equally to financial services investors, including with respect to core protections and investor-state dispute settlement, is vital. Such core protections would include ensuring that suppliers could establish a commercial presence, protection from expropriation, dispute settlement, and the free transfer of capital.
- TISA might include consultation among capital markets participants and regulatory authorities which would lead to the development of a list of regulatory obstacles where recognition arrangements could be developed.
- Establish the right of foreign financial services firms to invest in another TISA party using the corporate form of their choice, without restriction on the establishment of a new commercial presence or the acquisition (in part or in full) of an existing enterprise in another TISA country.
- Guarantee national treatment for foreign companies in the financial services sector to ensure that TISA parties afford foreign enterprises and investors the same treatment as domestic investors for regulatory and other purposes.
- Grant foreign financial services firms the right to provide cross-border services without establishing a commercial presence and without being subject to separate licensing and approval requirements that generally apply to firms with a commercial presence in a market.
- Permit dissemination and processing (within country and cross-border) of financial information to provide clients with services necessary for the conduct of ordinary business.
- Allow consumers to travel outside their home country to obtain any capital markets related service.
- Mandate that regulatory and supervisory bodies allow full market access and national treatment for all lines of insurance, including personal and commercial.
- Guarantee that domestic insurance regulation is made applicable to all companies equally in a given market, regardless of nationality.
- Establish clear disciplines to level the playing field between government-affiliated insurance entities and the private market within a reasonable time frame, including with regard to taxation, subsidization, or the provision by the government of any other commercial economic advantages, with such government-affiliated insurance entities subjected to supervision by the same regulatory authority as private companies.
- Prohibit the improper delegation of regulatory authority to non-governmental entities that dilute confidentiality and process protections accorded through governmental administrative procedures.
- Support the creation of a regular annual insurance dialogue on implementation.
- Subject to reasonable levels of protection, secure the right to cross-border transfer of customer and employee data for legitimate business purposes including the provision of more efficient and cost-effective service.
US Coalition of Services Industries: " we recognize the necessity of certain regulations (e.g., for national security, data protection, prudential reasons), there should be parameters and limitations for their application. For example, prudential carve-outs should limit the scope of allowable prudential measures to non-discriminatory measures that are subject to a rule of "least trade and investment distorting" (or something along those lines). Similarly, capital requirements should not be used as disguised barriers to entry or competition with domestic suppliers of comparable services (e.g., financial services, insurance).
Information processing: when an act, policy or practice of a relevant authority seeks to restrain cross-border data transfers or processing, that authority must demonstrate that the restriction is not an unnecessary restraint of trade or investment in light of alternative means by which to achieve the objective of protecting the identity of the customer, security of the data or the performance of prudential oversight. 23
The American Insurance Association wants 100 percent market access for the insurance suppliers of a TISA party in the markets of all the other parties, including freedom from discriminatory treatment, the absence of quantitative restraints and investment restrictions, the freedom to choose the form of legal entity through which they operate in a given jurisdiction, and the ability to provide insurance on a cross-border basis. This means strong disciplines on behind-the-border measures that indirectly restrict or limit market access, including state-owned enterprises, and discriminatory measures and regulatory schemes that operate as disguised trade restrictions. Prudential measures must be nondiscriminatory and no more restrictive than necessary to achieve prudential objectives. 24
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