RESTRICTEDWORLD TRADE
ORGANIZATIONS/FIN/M/32
9 November 2001
(01-5537)
Committee on Trade in Financial Services
REPORT OF THE MEETING HELD ON 11 OCTOBER 2001
Note by the Secretariat
1. The Committee on Trade in Financial Services held a meeting on 11 October 2001, under the
Chairmanship of Mr Jan-Peter Mout (The Netherlands).  The agenda is contained in airgram
WTO/AIR/1633.   An annotated agenda for this meeting was issued by the Chairperson on10 September 2001 (JOB(01)/126).
A. A
CCEPTANCE OF THE FIFTH PROTOCOL TO THE GENERAL AGREEMENT ON TRADE IN
SERVICES EMBODYING THE RESULTS OF THE FINANCIAL SERVICES NEGOTIATIONS
2. The Chairman recalled that in the two previous meetings, the delegations of Brazil, Jamaica,
the Philippines, Poland and Uruguay had provided information on the status of ratification procedures
in their countries.  Two other WTO Members had not ratified the Protocol yet, namely Bolivia and
Dominican Republic.
3. The representative of Uruguay informed the Committee that the Fifth Protocol was before the
Commission of International Affairs of the House of Representatives.  He added that a draft bill had
been prepared and was under review at the International Affairs Commission.  He finally repeated that
the improved offer presented by Uruguay under the Fifth Protocol had been incorporated in Uruguay's
legislative framework several years ago.
4. The representative of Brazil said that the Fifth Protocol had been approved by all the pertinent
Committees, both in the Chamber of Deputies and in the Federal Senate.  The last step pending for the
approval and subsequent acceptance of the Protocol was a vote in the Plenary Session of both the
Chamber and the Senate.  The date for these two votes had not yet been decided upon but he
expressed his hope that it would take place in the near future.  Lastly, he reiterated that the delays inaccepting the Protocol were not due to substantive problems but were solely the result of procedural
and administrative hurdles.
5. The representative of the Philippines said that the Senate had passed the Fifth Protocol on a
second reading last June.  He clarified that it was usually at second readings where most substantive
deliberations took place.  He could not provide any information on the date for the third, and last,reading by the Senate.
6. The representative of the European Communities encouraged the Members who had not yet
adopted the Protocol to proceed with their domestic procedures speedily in order to ratify it at the
earliest possible time.S/FIN/M/32
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7. The representative of the United States noted her country's concern for the slowness of the
progress in this process.  She understood that domestic legal processes, especially when Parliamentary
action was required, could be time-consuming and unpredictable, but she was particularly troubled by
those countries that either had not made reports at the meeting or did not require Parliamentary action
in order to complete their domestic processes that would undermine the credibility of those Membersas counterparts in future negotiations. She noted that the importance of the issue had been highlighted
by the fact that the Director-General had previously written to the Ministries of the Governments that
had not yet ratified to urge greater efforts.  He therefore called on those countries to make whatever
effort possible.  The United States would be raising this issue with those countries bilaterally.
8. The representative of Canada echoed the views expressed by the European Communities and
the United States.  She urged the countries that had not yet ratified the Protocol to ratify it at the
earliest time possible.
9. The representative of the Dominican Republic confirmed that the Senate had approved the
Fifth Protocol and that therefore the domes tic ratification procedures were concluded.
10. The Chairman said that as soon as the Secretariat received the formal communication from
the Dominican Republic, arrangements would be made for the re-opening of the Fifth Protocol to
allow ratification by this country.
11. The Chairman also thanked the delegations that had provided updates on the status of their
domestic procedures. He shared the concerns expressed by some delegations about the lack of
progress, and he expressed his hope that at the next meeting all countries not having yet ratified would
be in a position to make reports.
12. The Committee took note of the statements made.
B. TECHNICAL ISSUES – SECTORAL CLASSIFICATION OF FINANCIAL SERVICES
13. The Chairman recalled that at the previous meeting the delegation of Japan had indicated that
even though it still considered that the classification of certain activities relying heavily on new
communications technologies (such as the Internet) would merit further analysis, it had no intention to
insist on the original proposal put forward in October last year if, as it appeared to be the case, mostMembers were not interested in pursuing the discussion any further at that stage.  However, he also
recalled that a few delegations said that they were still reflecting on the questions raised by Japan and
indicated the possibility of coming back to them in the future, possibly at this meeting.
14. The representative of Japan said that given the pace of changes in the financial services
sector, classification issues might become important in the course of current negotiations.  New
services, such as value-added information services, might be considered as a combination of a service
already in the classification list.  However, it was far from clear whether Members' existingcommitments actually covered those services.  He added that it was not Japan's intention to stick to
the issue at that stage, but he reserved his right to refer to it in the future.
15. The Chairman proposed that, in the light of the statement made by Japan, the issue of
classification be set aside, and an item on "technical issues" be kept in the agenda for future meetings.
It would be a general item, under which delegations would be able to raise any technical issue.
16. The Committee so decided.S/FIN/M/32
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C. RECENT DEVELOPMENTS IN FINANCIAL SERVICES TRADE
17. The Chairman recalled that in the most recent meetings of the Committee, no delegation had
raised issues under this agenda item.  However, during the discussion on future work held at the
Committee on 2 April 2001, two delegations stated that this agenda item represented a good
opportunity for Members to provide information on national experiences regarding regulatory reformprocesses.  He considered that an exchange of information between delegations seemed to be very
useful and could provide additional background information for the upcoming negotiations on trade in
financial services.  He suggested that, in addition to the issue of regulatory reform, delegations might
want to raise other issues of relevance to the work of the WTO in the field of financial services, such
as the developments in the financial services indus try (particularly with regard to the application of
new technologies such as the Internet), the impact of liberalisation on the financial services industry,
or the relationship between market liberalisation and domestic regulation.
18. The representative of Argentina introduced an informal note entitled "Argentina and the
International Financial Architecture" (JOB(01)151, dated 11 October 2001).  He said that his country
was fully committed to deepening the ongoing reform s in the financial services sector in order to
preserve financial stability and to promote a faster rate of economic growth.  The balance between
banking and non-banking intermediation was very relevant for the consolidation of the system.  Onebasic feature of Argentina’s financial services was that banks managed a very high share of total
intermediate funds, and that non-banking products were well below their potential stage of
development.  For instance, while bank deposits amounted to 29 per cent of GDP, pension funds’
assets represented just 7.9 per cent of GDP, premium income of insurance companies 2.6 per cent of
GDP, and trading volume in stock markets 3.5 per cent of GDP (with only 114 listed firms in 2000,down from 181 in 1990).  The situation contrasted st rongly with the trend in advanced countries,
where non-bank financial institutions had been rapidly expanding over the last three decades,
providing long-term credit, enhancing corporate governance, and increasing the variety of financial
instruments to diversify risks.  Therefore, there was a need for reaching a more balanced structure
between banks and non-banks in Argentina and a significant deepening of the market for non-bankfinancial instruments.  The main pillars of the initiatives under way to deepen the market for non-bank
financial instruments were:
(a) Firstly, the strengthening of the regulatory and supervisory framework as a means of: (i)
ensuring the soundness of the intermediaries pr oviding such services, and the early detection
of prospective insolvency scenarios.  Broader financial and legal powers to regulators,
enhanced on-site inspections, and better human and information resources were vital inputs
for this task;  (ii) adequately protecting consumers and investors, through higher transparencyand competition in the marketplace and closer surveillance of corporate governance practices;
and (iii) effectively dealing with the increasing similarity between seemingly different
financial intermediaries and products, including the rising influence of financial
conglomerates.  In order to better cope with these new challenges, the Government has
adopted a comprehensive approach to strengthen coordination among financial servicesregulators.
(b) The second element of this undertaking related to the enhancement of the ability of
intermediaries, firms, and consumers to manage risks via:  (i) creation of more than one fund
for retirement savings, matching the risk profiles of different groups of affiliates;  (ii) less
restrictive investment guidelines for fund managers to diversify risks by broadening therequirements for eligible assets;  and (iii) provision of legal instruments needed for the
development of derivative financial instruments.
19. International Standards and Codes were the natural benchmark to designing and assessing the
actual progress in implementing such reforms.  Furthermore, the fierce competition among emergingS/FIN/M/32
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markets and the unstable international financial environment made convergence to international
practices even more appealing.  As described in the submission on JOB(01)/151, the Government of
Argentina had undertaken, with assistance from the IMF and the World Bank, a number of
assessments on the observance of international standards and codes .  The results showed a good
degree of adherence in most cases.  To continue along this path, the authorities intended to encouragethe implementation of the suggested policy changes and the involvement of the private sector.  Since
the reform process was entirely consistent with openness toward the rest of the world, the
Government of Argentina would place special emphasis on the trade of financial services, both
bilaterally and multilaterally in the context of FTAA and MERCOSUR.
20. The representative of the United States welcomed the efforts by the Chairman and other
delegations to brainstorm on ways to make the discussion under this agenda item more active or more
pertinent.  However, she considered that the ideas raised in the Chairman's annotated agenda weresomewhat broad in terms of structuring future discussions.  It would be important to distinguish
between the agenda item as it stood at present  - which would allow any delegation to provide general
information on any recent development regarding market access or regulatory issues - and what
Members might decide together in terms of more common work under this agenda item.  She found
that perhaps some of the elements might lead to confusion on the part of delegations, for example interms of the issue of regulatory reform, which seemed to be broader than Members might have
anticipated working on together.  That said, the United States itself had some additional ideas to throw
out for consideration of delegations.  She presented her country's ideas in the context of a report that
the United States had provided to the Committee fairly recently about the passage of the Gramm-
Leach-Bliley Act.  She reminded delegations that that report dealt with the substance of that Act,which resulted in certain changes to the United States system for regulation of financial services.
However, in reflecting further upon this agenda item, it occurred to the United States that delegations
might also find it useful if, in addition to the substance, some additional information were provided on
the process followed by the United States regulators to develop the final regulations to implement the
Gramm-Leach-Bliley Act, including the mechanisms in  place for interacting with interested persons,
such as market participants or potential market participants.
21. The United States representative explained that the Gramm-Leach-Bliley Act was passed in
December 1999, and in the Spring of the following year, proposed implementation regulations were
issued for comment.  Several hundred comments were received in written form and the Federal
Reserve, responding to those comments, made three changes to avoid some unintended consequences
which would have been injurious to foreign banks because of different standards in their home
countries.  Through this process of allowing market participants to comment and reflect on theimplications of those proposed regulations, the Federal Reserve was able to change the regulations in
three important aspects in order to avoid unintended results.  She stressed that the United States was
addressing the process of development of regulations, not the substance of the regulations themselves.
She expressed the hope that in the future other delegations might be in a position to share similar
experiences either in writing or orally concerning the regulatory process.
22. The representative of the European Commun ities informed the Committee of the adoption
and immediate implementation of a Community directive, passed on 20 March 2000, regarding credit
institutions and their operations.  The directive established and codified up to 20 directives that had
been adopted since 1976 concerning credit institutions.  The second important element of the directive
was the freedom of establishment and provision of services which, as a part of the single EuropeanMarket, were founded on mutual recognition practices and the principle of supervision by the state of
origin.  That mutual recognition was possible due to preliminary partial harmonization of national
legislation within the European Union.  He noted that the branches established in the Communities by
financial groups from third countries benefited fully from this regime which provided for a single
licence in the Community.  The third main element of this Directive was the definition of prudential
standards, including minimum capitalization, the limitation of excessive risk, and the control of non-S/FIN/M/32
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financial participation.  This directive served to highlight the importance of clarity and transparency
of the regulatory framework, which was to the benefit of financial service providers and their access
to the market.
23. The representative of Mexico shared  the views expressed in the Chairman's annotated agenda.
It would be most useful to diversify the subjects raised, keeping the practice of sharing national
experiences and exchanging views about them.  That would be very enriching for the Committee's
work.
24. The representative of Thailand had no objections on how to structure the debate on this topic,
although she reiterated her understanding that this agenda item would remain broad and that
delegations would be free to raise any issues, not only those related to the regulatory process.
25. The Chairman clarified that it was not his intention to limit the scope of this agenda item.
However,  within that broad scope, Members could develop some common themes without, of course,
excluding the possibility to raise other issues.  He said that it was important to look at ways to make
the discussion more interactive.
26. The representative of Canada informed the Committee that Canada's recent financial services
reform bill had received royal acceptance, as of the end of June 2001.  She considered that the United
States raised an interesting proposal that could add a new dimension to the discussion under this
agenda item.  The nature of the regulatory process had important bearings on the resulting substance
of any kind of regulatory form.  She finally added that the OECD had also been working on the issue
of transparency of the regulatory framework.
27. The representative of Malaysia sought some clarification as to what was meant by common
work in this Committee.  His understanding of the United States proposal was not meant to have a
prescriptive approach, but that the agenda item would remain as it was, that is, that any Member
would remain free to raise any recent development in the financial service sector.
28. The Chairman confirmed that no formal decision was sought, and that the agenda item would
remain broad, allowing delegations to raise any issue that was deemed appropriate under the scope of
this agenda item.  It was his understanding that the suggestion made by the United States would notpreclude Members from raising any issue regarding developments in financial services trade.  It
would be useful however to make the process more interactive.
29. The representative of Argentina shared the views expressed by Mexico and Malaysia.
30. The representative of the United States said that it was not her intention to narrow the scope
of this agenda item on recent developments in financial services trade.  Her suggestion was that,
within that broad scope, Members might want to share similar national experiences regarding the
process followed to develop their regulatory regime s relating to financial services.  She clarified in
that regard that the expression "common work" was related to the idea that Members might have
common experiences to share.  It was not suggested that there should be a common understanding of
outcomes or a common result of that exchange.  The United States did not see this work as
prescriptive, but rather as voluntary.
31. The Chairman concluded by saying that he heard no objection to the idea of trying to make
this discussion more interactive.  With that in mind, he proposed that, at the following meeting, he
would open the floor on the presentations made at this meeting, in order to allow Members to react to
them.  Delegations would, in fact, be free to choose their preferred approach.  Finally, the agenda item
would remain open for additional contributions. He also encouraged the European Communities and
the United States to submit their contributions in writing.S/FIN/M/32
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32. The Committee so agreed.
D. DATE OF THE NEXT MEETING
33. The Committee decided to hold its next meeting during the next cluster of services meetings,
in late November/early December.
E. OTHER BUSINESS
34. The representative of Panama raised the issue of the so-called "black lists" in financial
services, which had already been brought up by this delegation in the Council for Trade in Services.
35. Panama was very concerned about the fact that some Members had adopted - or had the
intention to adopt - discriminatory measures in their tax legislations which would have consequences
on services and service suppliers from Panama.  Some of these measures or intentions seemed to be
based on studies prepared in 1998 and 2000 by the OECD's Committee on Fiscal Affairs, in the
framework of what that organization had called "Harmful Tax Competition".  Other measures, whichhad been set up and applied with negative effect on Panama's services trade, might very well have
their own basis.  But in any case, the measures contemplated or currently applied had effects on
transactions with countries identified by these legislations as tax havens or low tax jurisdictions.  In
each case, these measures violated the obligations of these countries under the GATS.
36. Countries contemplating or applying these measures argued that the competitivity of
Panama's tax system affected their own tax revenues and influenced the placement of capital at the
international level.  Those who were currently applying – or were trying to apply - these
discriminatory measures were targeting supposedly harmful tax practices arising from low levels of
tax imposition or tax havens. He stated that none of those so-called harmful tax practices could be
attributed to Panama's tax regime, which was a modern, transparent and progressive system, that settaxes on a percentage basis according to international levels. Additionally, unlike the systems of
certain jurisdictions applying or intending to apply the previously referred to measures, the
Panamanian system did not discriminate in favour of foreigners or non residents to the detriment of
nationals or residents.  Furthermore, Panama had an advanced system of mutual legal assistance in
order to exchange information with other countries, as well as an excellent track record in thisconnection.
37. For these reasons, among others, and supposing - without accepting - that these measures
were compatible with the basic principle of most-favoured-nation in the GATS, their application in
the case of Panama would be an injustice.  The fact was however - independently of any injustice- that
both the measures proposed by the OECD and the measures currently applied by some WTO
Members were contrary to the GATS.
38. These measures were applied, or would be applied, with the intention of raising fiscal
revenue, in particular with respect to income obtained abroad. The form adopted by these measures
was just an additional surcharge on transactions with Panamanian banks. The effect of these measures
was, inter alia , to deny Panamanian service suppliers a benefit granted to other WTO Members'
suppliers; to make transactions more complicated and difficult; to reduce its competitivity; and to
discourage investment.  All this was done in a discriminatory way and contrary to the MFN principle.
39. The general exceptions to the MFN principle foreseen in the GATS were not relevant in the
case of the measures in question. The exceptions related to tax regimes, foreseen in Article XIV (d)
and (e) would allow a different treatment only in two circumstances:S/FIN/M/32
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(a) When the difference in treatment was aimed at ensuring the equitable or effective
imposition or collection of direct taxes in respect of services or service suppliers of
other Members (Article XIV:d));  and
(b) When the difference in treatment was the result of an agreement on the avoidance of
double taxation or provisions on the avoidance of double taxation in any otherinternational agreement or arrangement by which the Member is bound
(Article XIV:e)).
40. The second exception was not applicable because the measures had neither been taken nor
proposed on the basis of any agreement on the avoidance of double taxation.  He added that Panama
was not party to any agreement of this type. Beside s, the purpose of those measures was not to avoid
double taxation, but to recover losses resulting from tax evasion on the part of national or resident
taxpayers. In view of this, the first exception was not applicable either, in so far as its use was limitedto the imposition or collection of direct taxes in respect of services or service suppliers of other
Members.
41. He said that it was difficult to conceive how the Panamanian fiscal system might affect the
ability of other jurisdictions to impose and collect taxes on Panamanian services or service suppliers,
making it necessary to adopt discriminatory measures that were different to the ones applied withrespect to suppliers of other origins.
42. Panama had entered into contact - in Geneva and in capitals - with authorities and officials
from Argentina, Mexico and Venezuela, in connection with these concerns. He added that Panama
would enter into further contacts with these – as well as other - countries in the next few days, in order
to continue this dialogue. Panama hoped that these contacts would lead to the prevention of furtherdiscrimination, to the complete elimination of current discriminatory measures; and to the avoidance
of the need to purpose this issue further in the WTO.
43. The representative of Japan said that his country highly appreciated the briefing session by
the international standard-setting bodies held on 10 October.  He commended the representatives from
the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors(IAIS), and the International Organization of Securities Commissions (IOSCO) for their efforts to
share information on their ongoing activities with WTO Members.  The information provided would
serve as a useful backdrop for delegates conducting financial services negotiations.  He hoped that the
Committee's appreciation for these international organizations' presentations would be recorded in the
report of this meeting.
44. The representative of Guyana expressed his concern about a certain degree of discontinuity in
the WTO activities. He recalled that at Marrakesh Ministers took the decision that international bodies
should work with the WTO to ensure that there was consistency between policies pursued by the
WTO and these other international bodies, such as the IMF and the World Bank. Guyana was
concerned at the briefing session held on 10 October, when mention was made about certain
procedures referred to as "name and shame" by the representative from IOSCO. He also shared
Panama's concerns regarding taxation issues. He emphasized that international organizations wereexpected to work with the WTO to ensure consistency both in terms of work programmes and
policies. In that regard, he finally considered that the OECD initiative referred to previously was in
contravention of GATS Article IV.
45. The Chairman informed the Committee that, pursuant to the annual reporting requirement to
the General Council, the Council for Trade in Servic es adopted the reports of subsidiary bodies at its
meeting on 4 October 2001.  As the Committee had not been able to meet before that date, a written
procedure for the adoption of the Committee's annual report was followed. In that regard, a draftS/FIN/M/32
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annual report, identified as S/FIN/W/17, was circulated to Members on 24 September with the request
that any views or comments be communicated to the Secretariat by 2 October. Since no comments
were received, the report was annexed to the Annual Report of the Council, which was finally adopted
on 4 October.
46. The Committee took note of these statements.
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