RESTRICTED  WORLD TRADE  
ORGANIZATION  S/FIN/W/74 
21 September 2010 
 
 (10-4808) 
Committee on Trade in Financial Services  
  
 
IMPACT OF TECHNOLOGICAL DEVELOPMENTS ON REGULATORY 
AND COMPLIANCE ASPECTS OF BANKING AND  
OTHER FINANCIAL SERVICES UNDER THE GATS 
 
Background Note by the Secretariat
1 
 
  1. This Note has been prepared at the request of the Committee on Trade in Financial Services, 
following a proposal by Pakistan (Job(09)/107), to serve as background information for a Dedicated 
Discussion on this issue.   
2. This Note is structured as follows.  Sec tion I provides an overview of technological 
developments in financial services.  Section II l ooks at the challenges raised by these developments, 
particularly those arising in the context of th e cross-border supply of financial services through 
electronic means.  Section III discusses the regulator y approaches suggested by international standard-
setting organizations to deal with cross-border suppl y of financial services through electronic means.  
Section IV concludes. 
I. OVERVIEW OF TECHNOLOGICAL DEVELOPMENTS IN FINANCIAL 
SERVICES 
3. The financial services industry has become one of the most ICT-intensive industries.
2  At the 
end of 2007, the single largest industries in te rms of ICT spending were communications (US$404 
billion) and financial services (US$334 billion).  These were also the industries showing the highest 
ICT intensity ratio, measured in terms of ICT spending as a percentage of output:  6.3 for 
communications and 2.3 for financial services (UNCTAD, 2009).3  
4. The purpose of this section is to provide a non-exhaustive overview of technology-driven 
innovations in financial services, which can be grouped as new products or services, new production 
processes, new distribution channe ls, or new organization forms.4  
                                                      
1 This document has been prepared under the Secret ariat's own responsibility and without prejudice to 
the positions of Members and to their rights and obligations under the WTO. 
2 ICT stands for Information and Communication Technology. 
3 UNCTAD (2009) considers that, since banks and othe r financial institutions ar e likely to face various 
new regulatory challenges that may require investment in new hardware, software and compliance solutions, ICT use in the financial services industry is likely to be enhanced over the medium to long term. 
4 This categorization is partially based on Frame and White (2009), who consider that financial 
innovations (including technology-driven) can be grouped as new products or services, new production processes, or new organization forms.  One of the main differences between the two cl assifications is that while 
these authors consider online banking as a new service,  this Background Note incl udes online banking as a 
delivery channel.  Although useful for analytical purposes, these distinctions  are often blurred, since changes in 
one dimension may lead to changes in others or the introduction of new technology may lead to simultaneous 
changes in various dimensions.  For example, the use of Internet as a platform to deliver financial services may S/FIN/W/74 
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  5. Technology (broadly understood as including a dvances in computing, telecommunications, 
and finance theory) has allowed the introduction of new financial products , often derived from 
existing credit or deposit-type instruments, in a process generally known as financial engineering  
(Grosse, 2004).  One example is securitization (a form  of derivative), which is the process of taking 
an illiquid asset, or group of assets, and transformi ng them into a security (e.g. mortgage-backed 
securities).  Securitization permits separate financia l institutions to originate, service, fund and assume 
the credit or market risks of a portfolio of loans or other assets, thus specializing in those activities 
where it has a particular expertise or comparative advantage.  As such, securitization implies the unbundling of the production processes for many credit services.  These developments would not have 
been possible without complementary advances in technology across several disciplines, such as 
finance theory, and ICT (Enskog, 2006).  
6. Many new services  introduced over the last three decades relate to payment methods.  Smart 
cards for example have evolved from the original ATM cards, which only served to draw money from 
bank accounts, to more advanced cards such as deb it cards, which allow to actually make payments 
from a bank account at the point-of-sale, and store-va lue cards, which contain a computer chip that 
can store "electronic money" (which can then be used to pay for goods or services, such as public 
transportation).  Other innovations in payments incl ude digital cash (e.g. PayPal), electronic wallets 
(e-wallets), online bill presentment and payments , and even mobile payments (i.e. electronic 
payments via mobile phones).  
7. Innovations in payments systems, mainly th rough the introduction of ICT, have not only 
affected the way retail customers actually pay for goods and services, but also how business-to-
business (B2B) payments are made, as well as the way financial institutions conn ect and relate to each 
other in order to transfer funds, make payments, an d settle and clear transactions.  Examples include 
Automated Clearing Houses, real-time gross settlement systems (such as Fedwire and CHIPS), or even eChecks.  
8. Another important – and more recent – service innovation is online fina ncial aggregation – a 
service that allows users to organize and track th e value of all their financial accounts, assets and 
investments, from virtually any financial institution,  at one secure online site.  These services have led 
to the appearance of specialized suppliers – the fi nancial aggregators – and to the supply of these 
services by larger and more complex financial in stitutions, sometimes through the establishment of a 
separate subsidiary within the group.  
9. Technological change has also altered financial institutions' production processes .  Apart 
from the reorganization of activities within financ ial institutions brought about by the use of 
electronic transmission networks for the payments , transfers, clearing and settlement (referred to 
before), other technological innovations in the fields  of credit score analysis, insurance reimbursement 
claims analysis, and statistical modelling (central in the overall risk management processes at banks 
for example through portfolio stress testing and va lue-at-risk models) have had an impact on the 
supply of financial services.  
10. The production process has been altered also in other ways, as technology has permitted the 
separation and relocation of functions thro ugh outsourcing and offshoring, as well as the 
rationalisation of branches networks, due to the co mplementary use of other distribution channels.  
For example, increased ATM functionality has a lleviated branches from routine and costly 
                                                                                                                                                                    
 
be considered, from the perspective of the consumer, as a new service provided by the financial institution, but, 
from the institution's perspective, it implies a change in both the production process and the way services are 
delivered. See also Frame and White ( 2009) for an overview of economic st udies on technological change and 
financial innovation (with particular reference to the United States). For a discussion of technological change in 
UK retail banking, see Consoli (2005).  S/FIN/W/74 
 Page 3 
 
 
  transactions, such as cash services, allowing staff to  focus more on sales, customer advice, and the 
processing of complex transactions and account openings.  Offshoring includes both the use of foreign-based facilities owned by a firm for production processes formerly done 'onshore' in the home-country (i.e. production that is not outsourced ), as well as the use of foreign-based third-party 
vendors – i.e. cross-border outsourcing (Kelly and Nolle, 2008). 
11. Delivery channels  have multiplied thanks to the widesp read use of ICT.  Traditional bank 
branches are often equipped with automated teller machines (ATMs), which may also be used by 
clients of other banks.  ATMs allow holders of current accounts to withdraw money, both in their 
home-country and abroad, offering a 24-hour service.  ATMs can also be found away from branches, 
most often in locations where the customer traffic is high (e.g. a shopping mall) but the operation of a 
branch is not profitable.  The range of services o ffered by ATMs, in addition to money withdrawals, 
have expanded over the years, and now includes th e possibility of checking account balances, printing 
statements, making payments and money transfers,  withdrawing foreign exchange, ordering cheque 
books or other documents, a nd even processing deposits.
5  
12. Apart from ATMs, other electronic distribution ch annels have proliferated, particularly over 
the last decade, allowing customers to engage  in so-called electronic banking or e-banking.6  
Telephone banking, i.e. carrying out banking transac tions over the telephone, was the first important 
electronic distribution channel, covering a wide range of services, from telephone banking 
applications (using an automated phone answeri ng system with phone keypad response or voice 
recognition, providing a 24-hour information and transaction service) to fully-fledged customer 
relations centres.  
13. The most prominent electronic distribution chan nel of the last decade has been Internet 
banking, i.e. banking activities which are conducted by means of a PC, using the Internet as the 
delivery channel, and which has overtaken other – more traditional – forms of electronic banking, 
such as telephone banking.  For private banking cu stomers, Internet banking can actually take two 
forms:  the most popular is the use of a web brow ser software to perform their transactions, often 
called online banking; another form of Internet ba nking (usually called PC or Home banking) uses 
bank's software to activate the various features av ailable to the customer, who would then use the 
Internet as an access point to transport the transactions requests to his branch. 
14. Internet banking has become the fastest growi ng electronic distribution channel for banks.  
Most banks nowadays offer not only information serv ices online (e.g. account information, interest 
rate and foreign exchange quotes, contact center), but  also a wide range of other services, such as 
bank account opening, fund transfers and payments  (in the domestic market and abroad), bill 
payment, online applications (including for mortgag es, personals loans, and credit cards), and even 
investment services (e.g. buy and sell stocks, bonds, investment funds).   
15. Wireless technology has given a new dimensi on to both telephone and Internet banking, 
allowing the so-called mobile phone banking or m-baki ng, which enable customers to interact with 
their banks through a mobile device (e.g. mobile phone, smart phone).  Similar to online banking, m-
banking applications can be based on a web-browser or on a special banking software which has to be 
installed on the mobile device (so-called smart client  solutions).  At present, m-banking is mainly 
                                                      
5 Image-enabled ATMs can nowadays accept up to 50 cheques at once without an envelope, display the 
images on-screen, and print the images  on a receipt, thus allowing banks to  process deposits faster and making 
the funds available to customer sooner.  See Adams (2009), and DeCastro (2008). 
6 Electronic banking (e-banking) is a generic term making reference to the process whereby consumers 
may handle their banking business electronically, without  visiting a bricks-and-mortar institution. For an 
overview of e-banking in the European Union and the United States, see ECB (2007), and Bell et al. (2009), 
respectively. S/FIN/W/74 
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  used for information services (e.g. account aler ts, account balances, branch or ATM location 
information, mortgage alerts), although some tran sactions are already possible (bill payments, funds 
transfers).  It is still rarely used as a sales channel.
7  Nonbanks are also offering mobile payment 
systems or applications through wireless carriers or simply on their own (DeCastro, 2009).  A recent 
innovation, thanks in some cases to technology developed by nonbank suppliers, is the mobile 
transfer, which lets customers transfer funds di rectly to and from their primary bank accounts and 
without having to open separate accounts for th is type of transactions (Wade and Bills, 2009).  
16. The dramatic increase in the use of Inte rnet in the last decade has led to a new organizational 
form  in banking:  the Internet-only or virtual bank.  These banks do not  have a branch network, but a 
limited physical presence, for example, an administ rative office or facilities such as ATMs.  Some of 
them are stand-alone institutions, while others ar e affiliated (or have been taken over) by existing 
'brick-and-mortar' institutions, in what ob servers call 'click-and-mortar' model.  
17. Technology has literally transformed the securities industry in the last 15 years.  For one, on-
line trading has changed the relationship between investors and broker-dealers.  Before 1995, where 
there was not a single broker on the Internet, investor s typically bought and sold stocks by calling or 
visiting a broker-dealer who executed their orders in a Stock Exchange.  Today, millions of investors 
buy and sell stocks through the Internet.  Instead of talking to a broker-dealer about a trade or an investment strategy, on-line investors primarily  access their broker-dealers' Websites through the 
Internet and order securities trades without assist ance from a registered broker.  Fully automated 
transaction processing allow online broker-dealers to  charge lower brokerage fees.  Although on-line 
investors do not generally receive personal assistance, they do have access to a vast array of financial 
information, often at no charge, such as market da ta, historical charts, industry reports, and analyst 
reports.  
18. Although accessing the brokers' Website is the visi ble side of technology applied to securities 
trading, it is the securities' industry production pro cess that has been fundamentally altered by ICT.  
The so-called "front-end systems" (an additional la yer of computer hardware and software added to 
the broker's trading system) allows customers to ac cess information on the firms' Websites and submit 
orders to the firm for processing.  The firms also have internal systems that provide customers with 
information and investment tools, and deliver messages that confirm their orders have been received and executed.  Both on-line and full-service broker-d ealers have "back-end" systems that route trading 
orders to be executed.  
19. Online broker-dealers offer nowadays a spectrum of financial services and investment options 
similar to what used to be offered only by fu ll-service broker-dealers in the past.  These services 
include trading in stocks, options, mutual fund shares,  and a wide variety of fixed-income securities;  
opening various types of accounts (e.g. standard accounts, retirement accounts, education savings 
accounts, and mutual fund accounts);  and even tailored portfolio and investment advice.  
20. Driven by technological advances, the securiti es markets have become more complex with the 
appearance of new trading platforms, new pr oducts, new trading modalities, and new market 
participants.  Exchange-traded Funds (ETFs), si ngle-stock and stock-index futures, and online 
portfolios are examples of products added to the market in the last decade.  Another important 
development has been the creation of electronic ne tworks, such as Alternative Trading Systems (ATS) 
and Electronic Communication Networks (ECN), which provide execution capability outside the 
recognised Stock Exchanges, thus incre asing direct access to securities markets.
8  Electronic trading 
                                                      
7 For an overview of the current state of  mobile banking, see MMA (2009). 
8 For a discussion the impact and policy issues raised by electronic trading in wholesale financial 
markets, see Allen and Hawkins (2002).  S/FIN/W/74 
 Page 5 
 
 
  and the closely related ATS are at the origin of  other innovations, such as high-frequency trading, 
flash trades, and dark pools, which, as recently seen, may affect market stability (Dodd, 2010). 
21. Compared to online brokerage and online banki ng, development of the internet in the 
insurance industry has been somewhat cautious (H addadeen, 2006, and Blackler, 2009).  Technology 
has indeed helped insurance co mpanies make their production processes more efficient, from 
improvements in actuarial analysis, to policy crea tion and administration, to the automation of the 
underwriting process.  However, the sector has been relatively less successful in using the Internet to 
sell policies.  It is worth noting in that regard that not all insurance products are equally suited to 
Internet distribution.  Their suitability depends chie fly on how much advice is required: personal lines 
of insurance, which can be described and rated using a small number of parameters, and which are 
also suitable for online price comparisons, such as motor and household content insurance, are best 
suited for marketing and distribution on the Intern et.  More complex products, as well as financially 
important products, are relatively less suitable for In ternet distribution, due to the need for more 
personal interaction between the supplier and the customer.    
II. CHALLENGES FOR REGULATORS 
22. The changing financial landscape has brought with  it new risks and challenges for financial 
institutions' management, and fo r regulation and supervision.9  The major ones stem from increased 
supply of services across-border resulting from drastica lly lower transaction costs and the greater ease 
and speed of financial activities (Nsouli and Sc haechter, 2002).  Although these risks are not new, 
cross-border financial services can increase some of th em, such as strategic, operational, reputational, 
and legal risks.10 
23. Strategic risk  is one of the most significant ri sks faced by banking and insurance 
organizations supplying services electronically cross- border.  Strategic risk differs from other risk 
categories in that it is more genera l and broad in nature.  Strategic d ecisions to be taken by a financial 
institution's management will have implications for othe r risk categories, this applies in particular to 
decisions on how to position the institution in th e market and the role and predominance that 
electronic delivery channels will take within the or ganization.  The rapid changes in technology, the 
pace of competition with other banks and non-bank comp etitors could expose banks to substantial risk 
if the planning and implementation of  the strategy is flawed or othe rwise not well thought through.  In 
essence, bank management needs to carefully consider  how its "electronic" strategy, which may imply 
significant investments in IT systems and infrast ructure will help maintain the competitiveness and 
profitability of the institution, yet not lead to unwar ranted increases in its risk profile.  Supervisors 
need to carefully assess the pros and cons associated with financial institutions ' strategic options.   
24. Because of the reliance on technology, operational risk  is one of the more significant risks 
raised by the electronic supply of financial servi ces.  The soundness and security of the technology 
infrastructure, the integrity of data, and the availability  of internal controls are key issues that need to 
be considered by both the financia l institution and its supervisors.  On e particular issue to consider in 
this context is the outsourcing and offshoring (i.e. cross-border outsourcing) conducted by many 
financial institutions, which increasingly focus on their core business and partner with other 
institutions (sometimes foreign, and overseas) for so lutions outside of their core competencies.  
Reliance on third-party suppliers may increase opera tional risks, since operations processing and the 
management of security, integrity and availa bility risks become more complicated.   
                                                      
9 See BCBS 2000, 2001, and 2003, IAIS 2004, and IOSCO 2004.  
10 We are focusing here on risks which are particularly relevant in cross-border transactions. The 
supply of financial services through electronic means, either in domestic or foreign markets, raise other risks such as strategic risk, credit risk, liquidity risk, market risk, and foreign exchange risk. See BCBS 2000, 2001, 
and 2003, IAIS 2004, and IOSCO 2004. S/FIN/W/74 
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  25. Reputational risks  can arise from breaches of security and disruptions to the system's 
availability.  The more a financial institution reli es on electronic delivery channels, the greater the 
potential for reputational risks.  If one electronic financial institution encounters problems that cause customers to lose confidence in electronic delivery ch annels as a whole, or to view the institution's 
failures as system-wide regulatory or supervisory deficiencies, these problems can potentially affect 
other providers of electronic financial services.  Th is may be particularly serious in banking, due to 
the risks of contagion.  A bank’s reputation can be  impacted by any adverse development that raises 
doubts about the quality of its electronic delivery ch annel, such as poorly executed online services, 
failure to deliver secure, accurate and timely servi ces on a consistent basis, failure to provide 
appropriate disclosure, customer privacy violati ons, or major security breaches that may undermine 
consumer or market confidence in the bank's ab ility to appropriately manage online transactions. 
26. Legal and regulatory risks  arising from the supply of financial services electronically is 
another area of concern for financial services in gene ral.  Financial institutio ns can potentially expand 
the geographical scope of their services faster  through electronic means than through traditional 
means (including establishment abroad).  While some  of these uncertainties pre-date the development 
of the Internet and affect traditional cross-border financial services, the use of the electronic delivery 
channel facilitates the offering of services on a cross- border basis and thus increases these challenges.   
27. In some cases, however, unless financial institutions conduct adeq uate due diligence, they run 
the risk of potential non-compliance with a jurisd iction's local laws and regulations, including with 
applicable consumer protection laws, advertising and disclosure laws, record-keeping and reporting 
requirements, privacy rules, know-your-customer ru les, and anti-money laundering laws in foreign 
jurisdictions.  Compounding this challenge are ge nerally existing legal uncertainties over which 
country’s law applies to cross-border transactions a nd, in turn, the respective roles and responsibilities 
of home and host countries for online transactions with  local residents.  Further complicating matters, 
different jurisdictions are likely to continue to  have divergent rules and regulations regarding 
licensing or other requirements for foreign banks th at provide e-banking services to local customers 
without maintaining a local physical establishmen t in that country.  For example, in some 
jurisdictions, banking supervisors may not have th e authority to impose local licensing requirements 
on banks that provide cross-border e-banking services to local residents.  However, supervisors in 
other jurisdictions may have the authority to do so  and thus may require a local license in similar 
circumstances. 
28. Transaction risks are particularly relevant in insuran ce, including risks of any unauthorised 
alterations or modifications to texts, unprotected transmissions of information or data over computer 
networks between an insurer and its client, or vi ce versa, and difficulties surrounding the collection of 
premiums.   
III. REGULATORY APPROACHES 
29. The risks briefly outlined before, particularly as they relate to cross-border transactions, have 
been acknowledged and discussed by internationa l standard-setting organizations, which have 
provided regulatory guidance.  The recent case of Icesave provides a dramatic example of the risks 
that may arise to consumers in host countries fr om the operations of foreign banks through a 
combination of delivery channels – In ternet and branch form in this case.
11   
                                                      
11 Icesave accounts were Internet savings accounts offered by Br itish and Dutch branches of the 
Icelandic bank Landsbanki, available in the United Kingdom from October 2006 and in the Netherlands from 
May 2008. In less than two years, Icesave deposits re ached about £6 billion. When the crisis broke out, 
Landsbanki’s UK depositors staged a run on 3 October 2008. For further details on the Icesave dispute, see 
Sibert (2010).  S/FIN/W/74 
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  30. In July 2003, the Basel Committee on Banking Supervision (BCBS) issued guidelines on the 
Management and Supervision of Cross-Border El ectronic Banking Activities.  They are focusing on 
two areas.  The first is to identify banks’ risk ma nagement responsibilities with respect to cross-border 
e-banking, supplementing the BCBS Risk Management  Principles for Electronic Banking (July 2003), 
by stressing the need for banks to integrate cross-border e-banking ri sks into the bank’s overall risk 
management framework.  The second focus is on the need for effective home-country supervision of 
cross-border e-banking activities as well as conti nued international coope ration between banking 
supervisors regarding such activities. 
31. According to the BCBS, e-banking is generally an  extension of traditional banking, using the 
Internet as an electronic delivery channel for bank ing products and services.  Accordingly, in most 
countries existing banking laws and regulations that are applicable to traditional banking also extend 
to e-banking activities, and the principles of home  and host-country supervisory responsibility and 
cooperation embodied in the Principles for the Supe rvision of Banks' Forei gn Establishments (the 
"Basel Concordat") apply.  However, practical pr oblems arise when trying to enforce the Concordat 
principles to situations where a bank engages in cross-border e-banking activities and does not have a 
local physical presence.   
32. According to the BCBS, the introduction of cross-border e-banking does not change the 
fundamental responsibility of the home-country banki ng supervisor for ensuring effective oversight of 
a bank’s consolidated risk profile, risk mana gement and capital adequacy.  The home-country 
supervisor should assess whether a bank understands the challenges and risks associated with its 
cross-border e-banking activities as part of its assessment of the bank’s banking activities more 
generally, and should be satisfied that the bank has the adequate tools to identify and manage those 
risks.  Cooperation and coordination between home- and host-country authorities is also essential for 
an effective supervision of cross-border e-banking activities.   
33. The BCBS considers that the host-country supervis or (i.e. the supervisor of the country where 
the consumer is located) has a role to play.  Gi ven the open nature of the Internet, information 
regarding e-banking products and services are ava ilable around the world as soon as they are posted 
on a bank’s Website.  However, the simple availabilit y of this information does not in itself constitute 
cross-border e-banking, which has been defined by  the BCBS as "transactional" banking, and may not 
warrant host-country supervisory interest.  
34. Further, when contacted by a foreign bank that  intends to provide e-banking services to local 
residents but does not have a local license or estab lishment, the local banking supervisor may decide 
that the activity does not present any local supervisor y interest.  In situations where the host-country 
supervisor concludes that it does have a supervisor y interest in the banking activity concerned, the 
BCBS recommends that it should consider:  (a) wh ether cross-border e-banking activities are subject 
to effective home-country supervision; (b) whet her there is an existing adequate process for 
supervisory dialogue between the respective supervisors on the foreign bank’s activity; (c) the need to 
discuss with the foreign bank its intentions and plan s (the supervisor concerned might also discuss 
with the foreign bank’s home supervisor(s) any identified risks or concerns, and explore an 
appropriate framework for co-ordination and co-ope ration, if necessary); (d) the need to inform the 
foreign bank of the applicability of any relevant local banking laws, re gulations or requirements; and, 
finally, (e) the need to inform the foreign bank’s hom e-country supervisor (if a ny) of how it intends to 
ensure the bank’s compliance with relevant local  banking laws, regulati ons or requirements.  
35. The ability of a host-country supervisor to d ecide whether a foreign bank’s cross-border e-
banking activity is of supervisory interest may be to some extent constrained by the local regulatory 
regime within which that supervisor has to operate .  If a situation arises wherein a host-country bank 
supervisor determines that a foreign bank with no local presence is conducting cross-border e-banking 
activities in violation of local laws, regulations or requirements, the BCBS proposes the following S/FIN/W/74 
Page 8  
 
  options: (a) informing the foreign bank of any nonc ompliance with local laws or regulations; (b) 
informing the foreign bank’s home-country banking supe rvisor (if any) of the situation; (c) publicly 
advising local residents that the foreign bank is conducting cross-border e-banking business in 
violation of local laws and regulations; or (d ) taking any appropriate enforcement actions.  
36. With respect to foreign banks that may be  conducting cross-border e-banking activities and do 
not have a home-country banking supervisor that provides effective supervision, the host-country 
supervisor may wish to explore alternatives in accordance with the existing guidance provided in the 
Basel Concordat and its supplements.  As indicated in that guidance, a host-country supervisor which 
licenses a foreign bank that lacks a competent home-country supervisor takes on added responsibilities and risks beyond those normal for a hos t-country supervisor.  Conversely, the local 
supervisor may attempt to restrict such fore ign banks from doing e-banking business with local 
residents.   
37. Interestingly, the BCBS has suggested some po ssible indicators for the host-country regulator 
to ascertain a foreign bank's intention to extend ser vices on a cross-border basis to local residents, 
including:  
(a) The type and extent of e-banking activity with local residents; 
(b) whether the foreign bank’s Website is pr esented in the language and/or the currency 
of the local resident’s country;
12 
(c) whether the foreign bank’s Website uses an Internet domain name of a type reserved 
to or identified with the local market, or otherwise designs its Website in such a way 
as either (i) to suggest that it is located in the local jurisdiction, or (ii) to conceal its 
actual geographic location;  
(d) whether the foreign bank advertises or markets its e-banking products or services 
directly to local residents via channels su ch as local television, the print media, or 
direct mailings.  Such direct marketing w ould generally imply that the bank has an 
intention of doing business with local residents; and 
(e) whether there are quantitative indicators that could be part of a materiality test.  
38. Ideally, qualitative and quantitative indicators s hould not be automatic in order to allow 
banking supervisors the flexibility to assess on a case-to-case basis the need  to assert a host-country 
supervisory interest in cross-border e-banking activ ities conducted by a foreign institution.  Also, no 
single indicator is sufficient to determine whether local residents are being targeted by a foreign 
bank's cross-border e-banking offerings.   
39. In February 2004, the International Orga nization of Securities Commissions (IOSCO) 
Technical Committee issued a report on the Regul ation of Remote Cross-Border Financial 
Intermediaries.  This report identifies and discu sses the factors that jurisdictions consider in 
determining how to regulate cross-border securities br okers or agents that do not have a physical 
presence within their borders.  For example, jurisd ictions may consider the characteristics of the 
investor (e.g., institutional versus retail investor), the nature of the access (e.g., directly or through a 
                                                      
12 This might indicate the bank’s intention to target local residents of a specific jurisdiction but would 
need in most cases to be supplemented by other indicators. Further, according to the BCBS, supervisors should 
take care to ensure that indicators relating to language are a contributing but not a sole criterion in any determination that a bank intends to engage or is engagi ng in cross-border e-banking, if only because several 
jurisdictions might share the same official language.  S/FIN/W/74 
 Page 9 
 
 
  local intermediary), and/or the type of the security traded (e.g., derivative rather than common stock).  
Some jurisdictions also consider the nature of the home regulation of the firm that seeks remote 
access.  The decision to impose local requirements in addition to the requirements imposed by the 
home-country regulator depends on considerations relating to the goals of investor protection, 
efficient capital markets, and the appr opriate balance between these two.   
40. A survey conducted by IOSCO for the purposes of  drafting this report revealed that many 
jurisdictions exempt foreign intermediaries from ce rtain regulations under specific circumstances.  In 
fact, jurisdictions tend to fall somewhere within on a continuum from no exemption to full exemption 
of foreign intermediaries from local requirements.  Some jurisdictions apply local requirements in all, 
or nearly all, circumstances.  In addition, some  countries require foreign intermediaries to have a 
presence in the country where the services is supplie d, which basically prohibits access to remote 
cross-border services.  Other jurisdictions exempt foreign financial intermediaries from certain requirements depending on the regulatory goals that the intermediaries' activ ities implicate (e.g. so-
called "international dealers", which are only allowe d in some jurisdictions to supply limited services 
to sophisticated investors, and are subject only to minimal local requirements).  Still, other 
jurisdictions fully exempt foreign intermediaries from many, or all, local requirements if the regulator 
in the host jurisdiction has concluded that the intermediaries’ activities do not raise customer 
protection concerns under the relevant circumstances.  For example, some jurisdictions do not require 
licensing if the intermediary has not solicited customers.  
41. The IOSCO survey results show that those juri sdictions that provide some relief from their 
requirements follow two general approaches vis-à-vis  a foreign market intermediary that engages in 
cross-border transactions.  These approaches are based either on the sophistication of the investor or 
on unilateral or mutual recognition.  Some ju risdictions utilize both approaches in tandem. 
42. Under the former approach, host-country jurisd ictions do not apply all local requirements to 
foreign intermediaries that engage in cross-border transactions with sophisticated investors from the 
host jurisdiction.  This recognizes that certain highly sophisticated, well-capitalized investors do not 
need the complete protection of securities regulations under certain circumstances.  On the other hand, 
some jurisdictions resort to unilateral or mutu al recognition to decide whether to apply local 
regulations to a foreign intermediary, typically re nouncing to apply local requirements in cases where 
the home-country regulatory regime to which the fi nancial intermediary is subject meets certain 
investor protection criteria.  
43. According to IOSCO, some jurisdictions do not follow, or do not follow exclusively, these 
two primary approaches to determine if local require ments should apply to the foreign intermediary.  
For example, certain jurisdictions do not apply local  requirements to a foreign intermediary if there 
has not been direct solicitation by the latter, i.e ., if the local investor has contacted the foreign 
intermediary, on an unsolicited basi s, to effect a transaction on a foreign market.  Other jurisdictions 
consider the type of financial instrument offered in  determining whether to apply local requirements.  
44. In the case of insurance, although the Interna tional Association of Insurance Supervisors 
(IAIS) has not developed specific guidance for the supervision of cross-border supply of insurance 
through electronic means, it is generally considered that the Principles Appli cable to the Supervision 
of International Insurers and Insurance Groups a nd their Cross-Border Business Operations from 
December 1999 (the "Insurance Concordat") gene rally apply to these transactions.  The fourth 
principle states that "[f]oreign insurers providi ng insurance cover on a cross-border services basis 
should be subject to effective supervision."  Whethe r or not foreign insurers are permitted to provide 
insurance services on a cross-border basis in any ju risdiction is usually a matter of law in the 
jurisdiction concerned.  According to the IAIS, where consumers have the unrestricted freedom to 
seek insurance abroad on their own in itiative, the presumption is normally  that they take responsibility 
for their own actions.  However, where the active promotion of insurance contracts on a cross-border S/FIN/W/74 
Page 10  
 
  services basis is permitted, it is suggested that the host supervisor be notified of the intention of a 
foreign insurer to promote insurance contracts with in its jurisdiction, and that it checks that the 
foreign insurer is subject to prudential regulation of  capital strength in the home jurisdiction.  Another 
legitimate approach recognized by the IAIS is the a pplication of a special licensing procedure, or the 
introduction of specific safeguards to protect the policyholder. 
IV. CONCLUDING REMARKS 
45. Many of the financial innovations of the last three decades have been primarily driven by 
technology (broadly understood as including adva nces in computing, telecommunications, and 
theoretical finance), which has reshaped how fina ncial services are created, delivered, received and 
employed by end-users.  Contrary to technologies prevalent up to the mid-1980s, which automated 
processes without changing the business model;  modern technologies have transformed the way 
financial suppliers collect, monitor, and process in formation, thus fundamentally altering the way the 
business is run. 
46. This Background Note could be usefully complemented by additional information by 
Members along these same three headings:  (i) The impact of technological innovation in Members' 
financial services sectors, in terms of efficiency ga ins, competition,  availability of new products and 
services, and better access to finance;  (ii) the regulatory and supervisor y challenges raised by 
technological developments;  and (iii) the regulator y approaches adopted by Members with regard to 
the domestic supply of e-finance and the cross-bor der supply of financial services through electronic 
means.   
47. As indicated before, technological developmen ts in financial services have enhanced the 
potential for cross-border trade in financial services.   From a GATS perspective, this raises several 
questions that Members may wish to discuss:  
(a) Has technology led to the introduction of genuinely new financial services that did 
not exist at the time specific commitments were made?  How can such new financial services be identified and distinguished fro m technological innovations (e.g. in the 
way services are delivered) that do not change the nature of the service itself? 
(b) Would it be necessary to revisit the issue of  the distinction between modes 1 and 2 in 
the case of financial services supplied through electronic means?
13 
 
___________________ 
                                                      
13 For a summary of the previous discussion on the distinction between modes 1 and 2 in financial 
services, see Financial Services, Background Note by th e Secretariat, document S/FIN/W/73, paragraphs 47 to 
58.  S/FIN/W/74 
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