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26 July 1995

WTO Director-General Hails Financial Services Accord

Mr Renato Ruggiero, Director-General of the World Trade Organization, today welcomed the substantial consensus reached in the WTO on a financial services agreement. The following is his statement.

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"Members of the WTO deserve much credit today. Seldom has the cause of multilateralism so evidently succeeded. Countries have come together to take the benefits of more than three years of tough negotiations and difficult policy decisions in this very sensitive sector. They have understood that in acting together the sum of their efforts was far greater than each individual component.

"Naturally, with one major trading partner unable to improve the commitments it made in 1993 or to offer non-discriminatrory access to its market, this must be a second-best result. But it is a very good second best. The commitments which have been taken are substantial. They will bring new opportunities and greater security and predictability for investors in banking, insurance and other activities in the financial services sector. They will help promote merchandise as well as services trade where access to, and the functioning of, financial services is critical. And they will help facilitate new financial flows to developing and transition economies.

"After two-and-a-half years, all governments will be free to review their positions. Some may feel able to go further with their commitments after that time and it is to be hoped that the United States will then feel able to come back within the multilateral, MFN framework if it does not do so earlier. In any event, this is only the beginning of a process of progressive liberalization in the financial services sector. We will re-launch negotiations throughout the services sector within five years. That will be a valuable opportunity to build on today's undoubted success."

The WTO Agreement on Financial Services

The deal in a nutshell

Of some 76 WTO Members with commitments in the financial services sector, around 30 (counting the EU as one) offered improvements in the negotiations which led up to this agreement. Because the commitments vary so widely, it is difficult to generalize on their practical significance. Nevertheless, some elements are relatively common.

The most evident practical change, in many countries, will be the appearance of more foreign banks, securities firms and insurance companies in the market; the availability of banking, securities and insurance services sold across the border by overseas companies; and the provision of asset management and other financial services by wholly, or partially, foreign-owned companies. The other side of the picture is that for countries which are actual or potential exporters of financial services, opportunities for their banks, securities firms and insurance companies are going to be considerably enhanced through this agreement. For those already present in overseas markets, the conditions under which they do business may be improved or their ability to offer new financial products and services enhanced.

The nature of the commitments include, in some cases, improvements in the number of licences available for the establishment of foreign financial institutions; guaranteed levels of foreign equity participation in branches, subsidiaries or affiliates of banks and insurance companies; removal or liberalization of nationality or residence requirements for members of the boards of financial institutions; and the participation of foreign-owned banks in cheque clearing and settlement systems. While the emphasis in the schedules of commitments is on opening up markets and binding entry conditions, the WTO services agreement recognizes the need for adequate prudential regulation of all banking and insurance service providers.

These new commitments build on the very substantial commitments secured in the Uruguay Round. The full schedules of commitments in the financial services sector will be available publicly shortly, as they are for other services sectors

Background on Services in the WTO

The General Agreement on Trade in Services (the GATS) was one of the major achievements of the Uruguay Round and now forms an integral part of the World Trade Organization's legal framework. The GATS covers all service sectors, including financial services, and is composed of two elements. The first element is the set of rules and disciplines which apply to all WTO Members; the second is the "schedules of specific commitments".

The "schedules" are analogous to the tariff schedules which govern the market access commitments of each WTO Member with respect to merchandise goods. The services schedules, each of which amounts to a legally-enforceable, binding undertaking on the part of the Member concerned, contain commitments on individual service sectors and service activities which define the conditions for access to the market.

Key principles are: Most-Favoured Nation (MFN) which guarantees that a Member will not discriminate among Members supplying a service, and "national treatment" which guarantees that governments through their regulations and laws do not discriminate in favour of domestic service providers at the expense of overseas or foreign-owned service providers. Where Members have been unable to guarantee MFN treatment in a particular service activity they have entered a so-called "MFN exemption" - though these are normally very limited in number and scope. Where full National Treatment cannot be accorded, or other limitations on market access are imposed, the fact must be entered in the national schedule.

It was never expected, indeed never possible, that the schedules of services commitments resulting from the Uruguay Round negotiations could create immediate free-trade in services worldwide. These commitments are a first instalment of liberalization which will be extended progressively through further rounds of services negotiations. Just as important is the binding nature of the commitments so far made. They provide secure and predictable conditions for trade in services and, more especially, for overseas investment by services companies.

Why special negotiations on financial services?

At the end of the Uruguay Round some 76 countries had commitments on financial services in their schedules of initial commitments. However, there was a view among some industrial countries that the commitments in the schedules of at least some Members were not sufficiently forthcoming to warrant a final settlement. In particular, the United States announced, in 1993, that it would take an MFN exemption on some aspects of financial services unless the schedules were improved. In effect this meant that the US would discriminate among foreign financial service providers, offering more access to those trading partners who opened their markets on a reciprocal basis.

In order to avoid such an outcome it was agreed that the deadline for entering MFN exemptions and amending schedules in the financial services sector was extended until the end of June 1995 (six months after the establishment of the WTO). The negotiations to secure new improved commitments began in the Spring of 1994. At the end of June 1995, after several rounds of intensive negotiations, the United States announced that it remained dissatisfied with the results obtained. As a consequence it would remove most of its offer on financial services and take an MFN exemption for the whole of the financial services sector - while safeguarding the position of financial services companies already operating in the US market.

Recognizing the danger of all other significant participants in the negotiations downgrading their own offers, the European Union proposed that the end-June 1995 deadline be extended until July 28, 1995 to see if the deal could be salvaged - if necessary without the participation of the United States. This was agreed, and all Members undertook to consider the extent to which they could maintain and implement their best offers on an MFN basis at least for a limited period of time.

How does the Financial Services agreement work?

In effect the agreement means that the best offers negotiated over the past two years and, especially, the last few months, with the exception of that of the United States, will be implemented for an initial period up to November 1, 1997. At that point, Members will again have an opportunity (during the following 60 days) to modify or improve their offers on financial services schedules and to take MFN exemptions in the sector. It may well be that new negotiations on financial services will take place at that time.

The Protocol to which the new financial services schedules are annexed is open for acceptance until 30 June 1996 in order to allow Members time for domestic ratification procedures. The Protocol, and therefore the commitments, will enter into force 30 days after acceptance by all Members concerned. If, by 1 July 1996, all concerned Members have not accepted the Protocol a decision will be made within the following 30 days as to whether or not it can enter into force. During the period prior to entry into force Members have undertaken not to take measures which would be inconsistent with their future commitments.