Source: Finance Canada
WTO Agreement on Financial Services
The World Trade Organization (WTO) negotiations on financial services concluded successfully on December 12, 1997. Governments will have until January 29, 1999 to ratify the agreement. It is scheduled to come into force by March 1, 1999.
A main result of the agreement is that government measures affecting trade in financial services will be subject to the multilateral rules of the WTO’s General Agreement on Trade in Services (GATS) on a permanent basis, rather than the current interim basis. Furthermore, 56 WTO members (70 countries) have offered improvements to their schedules of specific commitments removing restrictions on foreign financial service providers. Members who do not live up to their obligations under the agreement will be subject to the WTO’s dispute settlement rules.
Canada’s obligations under the agreement will require that we maintain the level of access enjoyed by foreign financial service providers under the existing legislative, regulatory and policy framework. The most significant additional commitment will be to permit foreign banks to establish direct branches in Canada, reflecting a policy that had been announced by the government prior to these negotiations, in February of 1997.
Canadian financial institutions will benefit from more secure access to international markets, in turn providing new job opportunities for Canadians. Consumers will benefit from greater domestic competition.
The General Agreement on Trade in Services (GATS), the first multilateral comprehensive agreement on trade and investment in services, came into effect on January 1, 1995 along with the other WTO agreements that resulted from the Uruguay Round of trade negotiations.
At the end of the Uruguay Round negotiations in 1993, agreement could not be reached in a number of GATS sectors, including financial services. The financial services negotiations were extended until July 1995. However, at that time a permanent agreement could not be reached, primarily because the United States was concerned that access to key developing country markets was inadequate. As a result, WTO Members settled for a two-year, interim agreement on financial services. Under the interim agreement, specific commitments made by individual countries could be modified or removed at the end of 1997, depending on the results achieved during further negotiations that year.
The permanent agreement reached in December 1997 replaces the 1995 interim agreement.
The GATS applies to measures affecting trade and investment in services taken by central, regional and local governments except those supplied in the exercise of government authority, e.g., public administration services. As it applies to financial services, the GATS consists of three components.
First, there are the general GATS obligations, disciplines and other provisions which apply to all Members and to all service sectors. These cover, for example, most-favoured-nation (MFN) treatment, transparency and dispute settlement.
Second, the GATS Annex on Financial Services modifies some of the general GATS rules and definitions to take into account the special characteristics of the financial sector. In particular, it provides a prudential carve-out (which is explained below).
Third, the individual Member schedules set out specific commitments regarding market access and national treatment provided to foreign financial service providers. It was these schedules that were the focus of negotiation in 1997. In addition, and specific to financial services, WTO Members have the option of scheduling their commitments pursuant to the Understanding on Commitments in Financial Services. This document, which forms part of the schedule of Members adopting it, provides a standardized list of liberalization commitments in financial services.
Further detail on some of these key features of the GATS is provided below:
Canada made an important contribution to the negotiations by tabling a new schedule containing a number of improvements over its 1995 schedule. The new schedule will commit Canada to:
The decision to permit foreign banks to branch directly into Canada was previously announced on February 14, 1997, after extensive consultations involving a wide range of stakeholders, including through the Standing Senate Committee on Banking, Trade and Commerce, and the House of Commons Standing Committee on Finance. Subsequently, in November 1997, Canada included the establishment of foreign bank branches in its GATS financial services offer. The decision to permit foreign bank branching will bring Canadian policy in line with that of other developed countries. The GATS commitment on foreign bank branching will take effect no later than June 30, 1999, after the new legislation on foreign bank branching is approved.
In removing the requirement for foreign bank subsidiaries to seek Ministerial authorization before opening additional branch offices, Canada will now be giving all WTO Members the same access in financial services that it is giving to the U.S. and Mexico under NAFTA.
The new schedules tabled in the negotiations vary in terms of their coverage (i.e., the number of sub-sectors included) and quality (i.e., market access or national treatment restrictions).
Like Canada, most other developed countries have tabled schedules that include significant improvements over their previous (1995) ones. For example, the United States has included the results of federal legislation liberalizing interstate banking and interstate branching. The European Union has removed some restrictions at the member state level. Japan's new schedule reflects recent amendments to its foreign exchange and foreign trade control law, and its insurance business law, as well as its bilateral insurance agreements with the United States.
Among some of the improvements in the schedules of developing countries are:
As a result of the agreement, Canadian financial institutions will have more transparency and certainty regarding access to other markets. The financial services sector is vital to the Canadian economy. Canadian financial institutions are highly competitive internationally, and have significant export interests in North America, Europe, Asia and Latin America. The financial services sector contributes over 5 percent of Canada's gross domestic product (GDP) and directly employs more than 500,000 people. Improved business opportunities resulting from the GATS negotiations will lead to new export and job opportunities in Canada.
Increased competition in the domestic market will provide Canadian consumers with greater choice in products, improved quality of service, and lower prices.
Following the conclusion of the negotiations, the next step is a "technical verification" exercise to finalize the specific schedules of commitments and MFN exemption lists of participating Members. The exercise will be used to make technical corrections such as misspelled words, technical omissions or translation errors. Once the technical verification has been completed, certified copies of the schedules of commitments and MFN exemption lists will be issued for individual Members to accept.
WTO Members who participated in the negotiations have until the end of January 1999 to formally accept, i.e., ratify the agreement. If all participating Members meet the ratification deadline, commitments made under the agreement will take effect by March 1, 1999.
In Canada, the domestic implementation process will be undertaken in the context of new foreign bank entry legislation. It is expected that this legislation will be tabled in 1998.
The legal text of the GATS, including the Annex on Financial Services and the Understanding on Commitments in Financial Services are part of the Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations and can be purchased through the World Trade Organization or any bookstore selling governmental publications. An electronic version of the text is available through the WTO website (World Trade Organisation - Legal Texts. Select Annex 1B: General Agreement on Trade in Services. Click on "How to download and read these files" for information on using the files).
Schedules of specific commitments currently in force under the 1995 interim agreement can be purchased through the World Trade Organization or any bookstore selling governmental publications.
The draft schedules of specific commitments of participating Members under the 1997 agreement will not be released by the WTO until after the completion of technical verification and translation– by the end of March at the latest, it is hoped. We expect that once the schedules have been finalized, they will be made available to the public through the WTO website. In the interim, a non-attributable summary prepared by WTO on the main improvements of the new financial services commitments is available (Non-attributable summary of the main improvements in the new financial services commitments).
To view Canada's draft schedule of commitments under the 1997 agreement, click here. Please note that this version may be subject to changes resulting from the technical verification exercise.
A WTO guide to reading the GATS schedules of specific commitments is available (Guide to Reading the GATS schedules of Specific Commitments).
Further information on the 1995 agreement is contained in a Department of Finance document released in December 1995 (The General Agreement on Trade in Services: The Financial Services Sector). A revised version of this document that takes into account the 1997 agreement should be available within the next few months.
You can consult the Press Releases regarding 1) the tabling of Canada’s offer in November (Federal Government to Table a Revised Offer in the WTO Financial Services Negotiations in Geneva), and 2) the conclusion of the WTO negotiations (Canada Welcomes WTO Financial Services Agreement).
To obtain printed copies of the attachments cited above, you may contact the Distribution Centre, Finance Canada at 613-995-2855 or by fax at 613-996-0518.