WORLD TRADE
ORGANIZATIONS/CSS/W/71
4 May 2001
(01-2357)
Council for Trade in Services
Special SessionOriginal:  French
COMMUNICATION FROM SWITZERLAND
GATS 2000:  Financial Services
The following communication has been received from the Delegation of Switzerland with the
request that it be circulated to the members of the Council for Trade in Services.
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I. INTRODUCTION
1. Because of its cross-cutting nature, the financial sector supports growth in other economic
sectors. Insurance helps to reduce uncertainty and protects the players against unmanageable risks.
Thanks to the deposits they collect and the subse quent loans they grant, banks contribute to the
efficient allocation of resources among the different sectors and players.  Investment banks enable
companies to finance their growth and to adap t to the structural changes confronting them.
2. The liberalization of financial services enhances their efficiency.  Thanks to liberalization,
financial institutions can specialize their services on the basis of their competitive advantages, and
achieve economies of scale and of scope.  The mobility of the players contributes to the dissemination
of new technologies and helps to glean know-how fro m other financial centres.    In order to remain
competitive in an environment open to competition, in stitutions are seeking to reduce their costs, and
this could lead to lower prices or higher-quality services.
3. The liberalization of world trade and the transnationalization of enterprises has made the
liberalization of financial services all the more essential.  Since the end of the 90's the global economyhas undergone considerable integration.  Mergers, acquisitions and direct investment have
transcended national borders.  In order to carry out these complex transactions on new markets,
enterprises need the expert advice of the insurance companies and banks with which they are
accustomed to work.
4. The liberalization of trade in financial services must not be confused with deregulation.  On
the contrary, the liberalization of financial flows calls for a strict framework to protect consumers,
preserve financial stability and manage systemic risks.  To avoid impeding these flows and to increase
the benefits of liberalization, regulation and supervision must be transparent and fair.  Because trade
in financial services is closely linked to capital flows, there is but a very fine line between certain
monetary policy instruments and the required regulation which must be clearly defined.
II. TREATMENT OF FINANCIAL SERVICES IN THE GATS
5. The classification of financial activities is an important element in the progressive
liberalization process, since it helps to establis h the specific commitments of Members.  At the
conclusion of the Uruguay Round, Members agreed on a classification which is set out in the Annex
on Financial Services (hereinafter the Annex).  This  classification was used by most of the Members
in their schedules of specific commitments.S/CSS/W/71
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6. The Understanding on Commitments in Financial Services (hereinafter the Understanding)
enables Members to take on specific commitments with respect to market access on the basis of
minimum standards.  Members who adopt this appr oach commit themselves to maintaining the status
quo.  The Understanding provides for specific commitments in certain subsectors for modes 1 (cross-
border supply), 2 (consumption abroad), and 3 (commercial presence).  Mode 4 (presence of naturalpersons) is covered as well.  The Understanding also contains provisions for the supply of new
financial services and for transfers and processing of information.  It was accepted by some 30
countries, including Switzerland.
7. An examination of the specific commitments of Members reveals that mode 3 (establishment
of a commercial presence) is often a precondition for the supply of financial services, even if these
commitments are subject to numerous and signif icant reservations (legal form, authorized
participation of foreign capital, number of suppliers, economic needs test).  There are fewer specificcommitments for modes 1 (cross-border supply) and 2 (consumption abroad), suggesting a lesser
degree of liberalization.  The current level of liberalization of financial services stems from the
commitments assumed following the Uruguay R ound supplemented by the commitments resulting
from the negotiations completed in 1997 with the acceptance of the Fifth Protocol.
8. In the insurance sector, intermediation and auxiliary services are the subsectors in which
Members have assumed the fewest commitments.  Re insurance is the most internationalized sector,
often within the limits of the definition in the Understanding.  In the banking sector, brokerage, asset
management, settlement and clearing services, and provision and transfer of information are areas in
which there are few commitments.
9. Prudential regulation is subject to a general reservation.  This reservation, contained in the
Annex, stipulates that measures taken for prudential reasons, including for the protection of investors,
depositors, policy holders or persons to whom a fiduciary duty is owed by a financial services
supplier, or to ensure the integrity and stability of the financial system, prevail over all other
provisions.
10. The electronic supply of financial services is addressed by the GATS only marginally.
Firstly, the "technological neutrality" of commitments must be respected.  Secondly, the
Understanding specifies that the manner in which a product is delivered can confer upon it the value
of a "new" service.  It must be possible to supply all new services according to the commitments of
Members.  Today, electronic commerce in financial services is visibly thriving.  Most financial
institutions offer electronic services on different scales.
III. PROPOSALS
11. The current classification of financial activities, despite its flexibility, poses a certain number
of problems that it would be wise to solve.  Some Members were unable to use it because their
domestic regulatory and supervisory structure is different.  Certain new financial products (such as
electronic merchanting systems) may be classified in any one of several categories.  Finally, the clear
convergence between insurance and banking activities  tends to make the current distinction somewhat
obsolete.  We propose that the Committee on Trade in Financial Services (CTFS) discuss theseproblems with a  view to determining the extent to  which the classification will need to be reviewed.
12. We also recommend the increased use of the Understanding by Members as a minimum
standard for liberalization.  Doing so should enhance the clarity of the Members' commitments and
thereby contribute to the coherence of the international financial system.S/CSS/W/71
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A. SPECIFIC COMMITMENTS
13. The restrictions on commercial presence should be relaxed.  We encourage Members to
reassess the restrictions relating to authorized  legal form with a view to eliminating them.
Restrictions relating to equity participation and the number of suppliers of financial services should be
removed.  These liberalization measures should enhance the participation of foreign institutions,which, by transferring part of their know-how and th eir staff, will help to strengthen the operation of
the financial market.  Depending on the situation of the Members concerned, these measures could
include a transitional period.
14. In order to make the schedules more coherent and to ensure the clarity of existing and future
commitments, we recommend a reassessment by Members of their commitments in modes 1 (cross-
border supply) and 2 (consumption abroad).  In the financial services area in particular, the distinction
between these modes has become fuzzy.  An examination of the Members' schedules of commitmentsclearly reveals the differences between the commitments made in modes 1 and 2.  We strongly
encourage greater homogenization.  We would also like the CTFS to examine the possibility of
merging these two modes in the area of financial services.
15. The insurance sector deserves particular attention in the ongoing negotiations.  Since the
middle of the 90s this sector has experienced numerous disruptions.  It has been thoroughly
restructured and consolidated.  At the same time, the regulatory environment has evolved.  In the
coming years, insurance activities will continue to develop significantly owing to the new products
associated with pension fund management and asset management in general.  These changes should
be incorporated into the existing commitments.
16. We encourage Members to take on further commitm ents in the life insu rance, intermediation
services and auxiliary services subsectors.  At the same time, we urge them to reconsider the
reservations affecting their commitments under mode 3 (commercial presence) and to foster trade
under modes 1 and 2.
17. In the banking sector, we encourage Members to take on commitments in all modes of supply
for the following subsectors, which are still subject to important reservations:  brokerage, assetmanagement, settlement and clearing services, and supply and transfer of information.
B. 
PRUDENTIAL REGULATION AND SUPERVISION
18. The liberalization of trade in financial services must be accompanied by solid prudential
regulation and supervision in order to ensure confidence in the system, and hence its smooth
operation.  Members must be given plenty of room for manoeuvre so that they can implement the
necessary measures as soon as the problems arise.
19. The internationalized financial institutions are operating on numerous and heterogeneous
markets.  This diversification adds to the complexity of assessing the risks involved and their
interdependence, and hence complicates the task of the supervisory authorities who, in the end,
sometimes choose to limit the participation of foreign institutions.  From a strictly commercial point
of view, we recommend the increased use of the standards developed in the relevant international
forums (the Basel Committee, the International Association of Insurance Supervisors, theInternational Organization of Securities Co mmissions and the Joint Forum on Financial
Conglomerates).  We encourage the CTFS to keep abreast of the work of these organizations to the
extent that it affects trade in financial services.
20. Because of its difficulty and complexity, prudential regulation can be implemented
disproportionately depending on the problems involved.  The measures involved can make thefinancial markets less attractive and jeopardize their operation.  We would like the CTFS to beginS/CSS/W/71
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working on a more precise definition of the exceptions that can be invoked in relation to prudential
regulation.  A clearer definition would help to improve the transparency of financial markets for users
and operators, and this, in its turn, would have a positive impact on their attractiveness.  These
discussions could be conducted on the basis of the work carried out in the appropriate forums
mentioned above.
21. For all of the above reasons, it is essential that the CTFS should seek to cooperate closely
with the international organizations that are actively involved in the supervision of financial services
(the Basel Committee, the International Associati on of Insurance Supervisors, the International
Organization of Securities Commissions, and the Joint Forum on Financial Conglomerates).
C. E-FINANCE
22. Financial services use and produce a considerable amount of information:  to conduct market
analyses, to update their client's accounts, or to transact payments or stock market orders.  Theopportunities offered by information technologies in the financial services area are enormous.  In
order to take full advantage of these innovations, financial institutions must be able to operate in a
suitable commercial environment.
23. The WTO's work in the field of electronic commerce has been very limited.  The GATS
covers all service transactions, and the Agreement is neutral from a technological point of view,which means that the supply of services is not affected by the distribution procedure.  Indeed, it would
be difficult to imagine that the commitments assumed by Members could be called into question on
the basis of the procedure used.  In the maritime tran sport area, for example, this could mean that the
commitments did not apply to vessels that were not double-hulled.  In road transport, failing to respect
technological neutrality could mean that the commitm ents applied only to two-axle trucks, and not to
three-axle trucks.  All of the Members' commitments could be called into question.  Thus, the specific
commitments of Members apply to the supply of services by electronic means.  The degree of
liberalization of electronic trade depends on the Members' specific commitments in the different
sectors.
24. We encourage Members to take on commitments in modes 1 and 2, in particular when the
services target sophisticated customers, in order to contribute to the growth of electronic-commerce.
25. Since electronic-commerce has significant and specific implications for financial services, we
encourage the CTFS to coordinate its work with the other WTO groups that might be dealing with the
subject of electronic-commerce and with the international organizations working in that area.
26. We call on the CTFS to analyse the impact of the growth of electronic trade on current
commitments in financial services.  In particular, electronic-commerce affects the relationship
between modes of supply 1 and 2.
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