RESTRICTEDWORLD TRADE
ORGANIZATIONS/FIN/M/41
13 August 2003
(03-4217)
Committee on Trade in Financial Services
REPORT OF THE MEETING HELD ON 7 JULY 2003
Note by the Secretariat1
1. The Committee on Trade in Financial Services held a meeting on 7 July 2003.  The agenda is
contained in airgram WTO/AIR/2135.
2. The Chairman noted his intention under "Other Business" to raise two issues.  Firstly, the
adoption of the Committee's report update before the Cancun Ministerial Meeting; secondly, China's
transitional review mechanism.  In addition, he no ted his intention to brief Members, in informal
mode, on the informal visit to the headquarters of the Basel Committee on Banking Supervision andthe International Association of Insurance Supervisors, that took place on 27 June 2003.  He then
suggested that the agenda be adopted.
3. The Committee so agreed.
A. ACCEPTANCE OF THE FIFTH PROTOCOL TO THE GENERAL AGREEMENT ON TRADE IN
SERVICES EMBODYING THE RESULTS OF THE FINANCIAL SERVICES NEGOTIATIONS
4. The Chairman recalled that upon the request submitted by Poland, on 3 July 2003 the Council
for Trade in Services decided to re-open the Fifth Protocol for the accession of Poland.  Additionally,
on 6 June and 17 June 2003, Uruguay and the Dominican Republic respectively, accepted the Fifth
Protocol.  In terms of paragraph 3 of the Protocol and pursuant to the Decisions of the Council for
Trade in Services of 14 May 2003, the Protocol entered into force for Uruguay on 6 June 2003 and for
the Dominican Republic on 17 June 2003.  This information was contained in document WT/Let/447.
He also recalled that three other WTO Members had yet to accept the Fifth Protocol, namely:  Brazil,Jamaica, and Philippines.  He invited those three Members to provide any further information on the
status of their domestic processes, and perhaps give some indication as to when they expected to
conclude their acceptance procedures.
5. The representative of Brazil said that the ratification procedure was still ongoing in the
Brazilian Congress.  He added that, unfortunately, he was not in a position to indicate any timeframe
for the acceptance by Brazil.
6. The representative of the European Communities encouraged Brazil, Jamaica and the
Philippines to accept this protocol as soon as possible so that Members might have a clearer picture in
the current negotiations.
7. The representative of the United States said  that the information provided by Brazil was
rather vague.  The United States would appreciate more detailed information, including benchmarks
or target dates for concluding the ratification process.  She hoped Brazil made all the necessary efforts
                                                     
1  This document has been prepared under the Secretariat's own responsibility and without prejudice to
the positions of Members and to their rights and obligations under the WTO.S/FIN/M/41
Page 2
to ensure the acceptance of these commitments made in the 1997 negotiations.  She added that the
United States would also appreciate further information by Jamaica and the Philippines on their
acceptance procedures.  She noted that at the previous meeting the Philippines informed that its hold-
up with regard to the acceptance of the Fifth Protocol was procedural.  She hoped that since it was a
procedural issue Philippines would have something to report with regard to the completion of this
ratification procedure.  She noted also that Jamaica had not provided information for quite a while.
She urged Jamaica to provide further information to the Committee with regard to their domestic
procedure for the acceptance of the commitments undertaken as part of the 1997 negotiations.
8. The Chairman noted that there was not any representative from Jamaica and the Philippines in
the room at that time.
9. The representative of Canada urged Brazil, Jamaica and the Philippines to ratify the Fifth
Protocol as soon as possible.
10. In concluding, the Chairman said that some interest was expressed in obtaining further
information about the domestic ratification procedures in the three outstanding Members, namely
Brazil, Jamaica and the Philippines.  He added that it would be helpful if those three Members could
provide the Committee at its next meeting with additional information regarding their domestic
processes.
11. The Committee took note of the statements made and decided  to revert to this item at the next
meeting.
B. TECHNICAL ISSUES
12. The Chairman recalled that at the last meeting, Cuba and Thailand made further comments on
the IMF document on "Financial Sector Stability, Reform Sequencing and Capital Flows" that had
been circulated as Job(03)/52.  On that occasion, Thailand –at least explicitly- said that it would like
to reflect further on the issue under discussion, namely the scope of Members' obligations under the
GATS regarding capital movements attached to spec ific commitments on certain financial services.
He reminded that he had concluded that meeting by saying that the Committee would revert to this
agenda item - Technical Issues - at the present meeting.  He then invited delegations to makecomments on the paper prepared by the IMF, to make further comments on the issue under
consideration, or indeed to raise any other technical issue for consideration by the Committee.
13. There were no interventions under this agenda item.
C. 
RECENT DEVELOPMENTS IN FINANCIAL SERVICES TRADE
14. The Chairman said that at the last meeting, Hong Kong, China provided written replies to the
questions raised at the previous meeting on its paper about e-finance.  These replies were circulated as
an addendum to document S/FIN/W/25.  Additionally, Switzerland presented another communicationon e-banking, circulated as S/FIN/W/26.  Both co mmunications stirred up an interesting discussion.
A wide range of issues was raised, such as the re gulation for consumer protection, the link between e-
banking and traditional banking, the challenges posed by money laundering and other fraudulent
activities, the question of the so-called technological neutrality both in domestic regulation and in
GATS' commitments, and matters related to the enforcement of contracts between consumers andsuppliers.  He also reminded that he had concluded by saying that the discussion showed not only how
important it was for the Committee to have up-to-date information on e-finance trends, but also to
what extent the developments in e-finance might be related to the current negotiations of specific
commitments in financial services.  There was certainly a need to continue discussing this issue, bothS/FIN/M/41
Page 3
from a regulatory and a trade perspective.  On that occasion, he encouraged other Members to share
their experiences, or even their concerns, regarding e-finance regulation and trade.
15. The representative of Switzerland provided preliminary answers to the questions posed by
Members at the last meeting with regard to the Swiss communication on e-banking.  Regarding the
concept of technological neutrality, in Switzerland' s view, technological neutrality was an essential
assumption of the GATS.  It meant that services were subject to the same commitment regardless of
the technology used to provide them.  Violation of this principle could damage commitments already
undertaken in previous negotiations.  Technological neutrality did not preclude regulations from
applying to a specific means of delivery of a se rvice, as long as it fitted into the corresponding
commitment.
16. With regard to the questions on the impact of e-banking on the financial sector, he said that it
was difficult to assess the impact of e-banking on the financial system, in developing and developedcountries because the evolution was relatively new.  The lack of reliable data was an additional
problem.  Some studies had been conducted within  the World Bank or UNCTAD on the opportunities
of e-finance for emerging markets.  One conclusion that needed to be assessed was that some
countries might have unsophisticated financial systems today with limited services and poor
infrastructure.  To the extent that financial services were provided, they might reach only selectgroups:  urban customers with high net worth, state enterprises, and large agribusiness rather than
small and medium-size firms, farmers or micro-enterprises.  Resource allocation and intermediation
costs could be improved through e-finance.
17. As to whether sound and safe banking could be achieved through electronic means, he said
that e-banking was an extension of traditional banking and did not per se bring additional concerns.
The use of e-banking might exacerbate existing supervisory concerns.  At the time being, there was no
specific rule in Switzerland with respect to e-banking, including when performed on a cross-border
basis.  As far as prudential regulation was concerned, the Swiss surveillance authority distinguished
between consumer protection and the avoidance of systemic failure.  The surveillance authority in
Switzerland supervised banking institutions in Switzerland and thus guaranteed customers of soundpractices by supervised institutions.  It was not willing to monitor the activities of banks operating
from abroad.  The Swiss law thus prohibited banks from misleading consumers with regard to their
origin.  The law wanted it to be clear for the customer as to whether a bank was authorised, hence
supervised, in Switzerland.  It was then up to the cu stomer to assess the strength of the institution he
was willing to deal with.  No problems had been reported to the surveillance authority concerning
misled customers.
18. As for avoiding systemic failure, the surveillance authority applied the general principles
elaborated under the auspices of the Basel Committee on Banking Supervision and its dedicated
working group on electronic banking.  For a summary of the results of this group, he referred
Members to part I of the communi cation S/FIN/W/26.  The surveillance authority had not encountered
any difficulty with cross-border banking.  When concerns arose, they sought cooperation from the
home country of the institution to avoid any gap in supervision.  This approach did not preclude anyfuture specific regulation for e-banking.  Such regulation would be taken for prudential reasons only
and not discriminate between foreign and domestic suppliers.  Swiss banks had not been contacted by
foreign surveillance authorities in relation with th e operation of their websites, neither had they been
sued by any customer in a foreign court.
19. Operational risk was not specific to e-banking e ither.  All financial institutions relied heavily
on their IT infrastructure.  Brick-and-mortar financial institutions made intensive use of electronic
means.  A break-down of its IT system would be very damaging to any financial institution.  The
terrorist attack on 11 September 2001, demonstrated the strength of IT systems management by the
banks.  Moreover, operational risks (including IT systems) formed part of the overall assessmentS/FIN/M/41
Page 4
conducted by external auditors reporting to the surveillance authority.  In addition, focussed tests were
being carried out to assess protection against attacks such as “hacking”, “sniffing”, “spoofing” or
“denial of service”.
20. In a recent survey conducted by the surveillance authority, banks reported no problems
relating to the operation of their websites, apart from short-term system interruptions.
21. As to the question regarding the place of enforcement of the contract between the consumer
and the services supplier, unless otherwise agreed between the parties, enforceability of international
contract law was ruled in the Federal Act on Private International Law.  This act was technologically
neutral and it was not foreseen to modify it because of technological developments.  Hence, general
rules applicable to international transactions would continue to apply.
22. As to the reasons for the closing down of the only virtual bank established in Switzerland, he
said that during the so-called Internet bubble many companies were created and later shut down.  Itseemed that the virtual-only bank was one of those.  It had to be stressed that many brick-and-mortar
banks set up projects for electronic banking.  Some of them had developed and were performing quite
well, while others had been resized or abandoned.  It was also worth noting the difficulty for a bank to
work on a virtual-only basis.  In spite of the liberal regime, customers in Switzerland occasionally
requested physical contacts with their banks for more sophisticated services.  It was interesting to notethat in Hong Kong, China, the Internet bank used the retail network of a sister bank within the same
banking group.
23. With regard to the application of money laundering rules to e-banking transactions, he said
that the Swiss surveillance authority was convinced that the use of e-banking did not fundamentally
affect the relationship between the banker and his customer.  Pending the entry into force of a new acton e-signatures, it was not possible to open an account in Switzerland entirely by electronic means
because written forms were required.  No difficulties had been reported to the surveillance authority
regarding the implementation of money laundering rules in the context of e-banking.  He said that this
answer was preliminary and he would revert to the issue at the next meeting.
24. The representative of Chinese Taipei said that after the two valuable presentations on e-
banking and e-finance by Switzerland and Hong Kong, China, Members had benefited a lot and
become more familiar with the opportunities and challenges of e-banking.  He focused then on one
particular issue -the relationship between e-banking and anti-money laundering initiatives.  So far as
the regulatory regime was concerned, there were at least three basic rules with regard to anti-money
laundering efforts.  The first rule, as the representative of Switzerland mentioned, was that the
customers in person should open accounts.  In other words, in this case, the virtual provision may not
work for these kind of activities.  The second rule was the so-called "know-your-customer" rule.  Thethird rule was the so-called SARS, standing for "Suspicious Activity Report System".  Banks were
required by the Supervisory Agencies to report any suspicious activities.  The implementation of these
rules was the key to success in this area.
25. He also said that in paragraph 7 of its written replies, Hong Kong, China mentioned that there
was actually one virtual bank in operation in that Member.  Taking into account the first rule that hehad referred to previously – the opening of deposit accounts in person- he asked Hong Kong, China
how did a completely virtual bank performed that activity and what was the regulation applied.
26. The representative of Malaysia said that he would raise some of the points his delegation had
made at the meeting of the Special Session of the Council for Trade in Services.  The complete
statement was being sent to the Secretariat for circulation among Members.S/FIN/M/41
Page 5
27. First and foremost, Malaysia remained committed to the liberalization of its financial services
sector, but liberalization had to be carried out in a careful and phased manner.  Malaysia had been
badly hit by the Asian financial crisis a few years ago.  In order to pursue Malaysia's long-term
objective of building a resilient and competitive financial sector, in 2002 the authorities launched the
Financial Sector Master Plan and the Capital Market Master Plan.  The objective was to ensure that,apart from consolidating the domestic sector, domestic institutions would be prepared for future
liberalization.  The masters plans foresaw a ten year timeframe.  The so-called phase 1 of both masters
plans focused on capacity building, that is, on ensuring the effectiveness and competitiveness of
domestic financial institutions and on establishing an efficient consumer protection infrastructure.
Progress had been on track, although several developments in the past year had posed serious
difficulties for the domestic institutions, which motivated the revision by the authorities of some
aspects of the implementation.  From 54 banking institutions at the beginning of the consolidationprocess, the domestic banking institutions had consolidated into 10 banking groups at the end of
December 2002.  There were 13 foreign owned commercial banks.  In the case of broking activities,
in the same period –from 2000 to December 2002- the number of stock broking companies went from
66 to 40.  The process was a major one in terms of the scale and complexity, as it involved more than
50 banking institutions and 66 stock broking companies.  The merger exercise had not been easy andmuch remained to be done in order to consolidate the cooperate cultures of those many institutions.
There were also difficulties in merging databases and IT systems without disruption to efficiency.
There were other difficulties, such as human resource management and manpower employment
issues, which were still being addressed.  The objective in that regard was to ensure that there would
be minimal social disruption, in the light of the geopolitical uncertainties developing in the region.
28. Concerns had arisen lately with  regard to the possibility of new round of mergers involving
domestic financial institutions.  In the wake of such developments, it was believed that a longer period
of adjustment and consolidation might be necessary.  As of today, there were 13 fully foreign-owned
banks, and at the end of 2002 foreigners owned, on average, 23 per cent of the total equity in the
banking system.  On an aggregate basis, foreigners counted for about 33 per cent of total commercialbank assets.  In the insurance sector, out of a total of 54 insurance companies, 23 were majority
foreign owned.  The foreign market share in the insurance industry remained high and accounted for
77 per cent of life insurance premiums and 40 per cent of general insurance premiums.  In the capital
market, 5 out of 79 licensed fund management companies were majority or fully foreign owned,
whilst in the investment advisory sector, close to half of the licensed advisers were majority or fully
foreign owned.  Besides equity participation, foreign participation had taken another forms, such as
participation through strategic licenses with local entities.  In the insurance sector, there were 10bank-assurance arrangements involving locally incorporated foreign owned banks, of which 9 were
established with domestically owned insurance companies.  Hence, the consolidation process was
quite close to completion, but as he mentioned before, there might be another round of mergers.
Malaysia would like to consolidate the banking sector further.  This first phase would therefore be an
important benchmark as to how far the liberalization could advance in the near future.  A ten-yearperiod was contemplated.  Malaysia's commitment to liberalization was therefore a question of time,
not of intention.  And liberalization must be carried out at a pace consistent with the prevailing
conditions.  And more importantly, it was important to ensure that liberalization did not marginalize
domestic financial institutions.
29. The representative of Australia requested further information from Malaysia.  In that regard,
he said that it was clear from Malaysia's statement that foreign financial institutions had a well-
established presence within the market, contributing to Malaysia's economic development.  However,
it was not clear why the process of consolidation should necessarily preclude or influence the timing
of further liberalization.  He asked therefore whether Malaysia could contemplate further
commitments in those areas, in recognition of the fa ct that foreign institutions played a large role in
the economy.  In particular, he wondered to what extent could commitments be made to furtherS/FIN/M/41
Page 6
liberalize the activities that foreign institutions could perform, in light of the management and
manpower shortages and difficulties that were mentioned by Malaysia.
30. The Chairman asked Malaysia what the original instigator of the consolidation process was,
whether it was government-driven or market-driven.
31. In replying to the questions raised, the representative of Malaysia said that the consolidation
process had been both government-driven and market-driven.  The Banking and Financial Institutions
Act of the early 1990s included already some form of consolidation.  As a result of the economic
growth of the 1990s, by the time of the financial crisis, too many banking institutions had established.
Market players were to a certain extent pushed to consolidate into 10 banking groups, and
consideration was currently being given to moving to 5 banking groups, in order to make them
stronger.  Turning to the question posed by Australia, he said that because the consolidation process
was meant to allow these banking groups to be more competitive and efficient, there was a need for aphased liberalization process.  There had always been the concern that opening up too fast might not
serve the national policy objective of making the domestic banking system more resilient and
competitive.  The masters plans contemplated a 10-year timeframe.  Once the system had completed
phase 1, then the government would move into phases 2 and 3, the latter being more specific on future
liberalization for foreign providers.
32. The Chairman noted with appreciation the contributions by Hong Kong, China Switzerland.
He noted the questions raised by Chinese Taipei on money laundering, and the answers provided by
Hong Kong, China.  He also appreciated the intervention by Malaysia, which contained a lot of
relevant information.  His understanding was that statement would be circulated in some form to
Members.  With regard to e-finance, he enco uraged other Members to come up with similar
presentations and documents.  It would be interest ing in that regard to examine developing country
experiences in this area.  He considered that further discussion on e-finance was of interest, especially
in the light of ongoing negotiations in the area of financial services.
33. The Committee took note of the statements made, and decided  to revert to the issue of e-
finance at the next meeting.  He reiterated also that, under this agenda item, Members were also
encouraged to come forward with experiences regarding their financial sector.
D. DATE OF THE NEXT MEETING
34. The Chairman said that, in light of the seminar on domestic regulation to be scheduled in
October, it might be difficult to hold the next meeting of the Committee in the second week of the
next cluster of services meetings, as had been done on previous occasions in order to profit from the
presence of financial services experts in Geneva.  Taking into account this, and in order to facilitate
the participation of financial services experts, he  suggested that the Committee hold its next meeting
as close as possible to the end of the first week of the next cluster of services meetings, in October.
35. The Committee so decided.
E. OTHER BUSINESS
36. The Chairman raised formally two issues.
1. The report for the Cancun Ministerial Meeting
37. The Chairman recalled that in accordance with the reporting requirements for the Fifth
Session of the Ministerial Conference, the Committee had to produce an update to its 2002 annual
report.  That update –which described developments  since the last annual report of the Committee –S/FIN/M/41
Page 7
had been circulated as document S/FIN/W/27.  The updates produced by the subsidiary bodies of the
Council for Trade in Services had to be attached to the update report that the Council for Trade in
Services itself had to submit to the General Council.  Since the Committee was to meet after the
meeting of the Council for Trade in Services in which the update reports had to be approved, the
Committee's update report was approved through a written procedure.  Accordingly, since nosuggestions or comments on the draft had been transmitted to the Secretariat by Tuesday, 1 July 2003,
the report was considered approved and was transmitted to the Council for Trade in Services as
document S/FIN/9.
2. Transitional Review under Paragraph 18 of the Protocol on the Accession of the
People's Republic of China
38. The Chairman recalled that section 18 of the Accession Protocol of the People's Republic of
China provided for an annual review of the implementation by China of the WTO Agreement and ofthe related provisions of China's Accession Protocol.  As indicated in Section 18, the Committee on
Trade in Financial Services was one of the bodies in which this review had to be conducted.  The
results of the Committee's review would be report ed to the Council for Trade in Services, which
would subsequently report to the General Council, which in turn would conduct its own review.  Last
year the Committee conducted this review at its meeting on 21 October.  The report of that reviewwas contained in document S/FIN/7.  This review must be scheduled sufficiently in advance of the
General Council meeting, in order to allow for a useful discussion there.  Taking into account all those
elements, he announced that he would conduct cons ultations in the following weeks regarding the
timing and additional organization aspects of this review.
39. The Committee took note of the statements made.
___________