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m COMMISSION OF THE EUROPEAN COMMUNITIES 
I Brussels, 29.06.1995 
COM(95) 303 final 
REPORT FROM THE COMMISSION 
ft TREATMENT ACCORDED IN TfflRD COUNTRIES TO COMMUNITY 
CREDIT INSTITUTIONS, INSURANCE COMPANIES 
AND INVESTMENT FIRMS 

CONTENTS 
CHAPTER I : 
CHAPTER II : 
CHAPTER III: 
CHAPTER IV: Introduction 
The European Single Market in Financial Services 
Uruguay Round and extended negotiations on financial services 
Treatment of EC securities firms, credit institutions and insurance 
companies in third countries - findings and conclusions 
ANNEXA : Article 7 of the Investment Services Directive 
ANNEX B : Developments in the Single Market in Financial Services 
ANNEX C : Summary Table 

CHAPTER I - Introduction 
1. Purpose of the report 
The Commission is required by Community law to draw up a report for submission to the 
Council examining the treatment accorded to Community investment firms in third 
countries as regards establishment, the carrying on of investment services activities and 
the acquisition of holdings in third country investment firms1. This report must be drawn 
up no later than six months before the bringing into effect of the Investment Services 
Directive. 
According to the preamble of the Investment Services Directive, and the corresponding 
texts of the other financial services directives the Commission's report forms part of a 
procedure "intended to ensure that Community investment firms receive reciprocal 
treatment in the third countries in question". This procedure is intended to be "flexible" 
and to make it possible to assess reciprocity on a Community basis. It has the central aim 
"to improve the liberalisation of the global financial markets in other third countries" and 
"provides for procedures for negotiations with third countries and as a last resort, for the 
possibility of taking measures involving the suspension of new applications for 
authorisation or the restriction of new authorisations". 
The first report of this kind was adopted by the Commission on 15 July 1992 (SEC (92) 
1343 final and XV/4004/92-EN). That report covered treatment accorded by third 
countries to Community credit institutions and insurance companies. However, 
investment services were also covered by that report, in so far as they were included in 
the list of activities subject to mutual recognition under the second banking directive (see 
Annex on Banking). 
The 1992 report explained in detail the functioning of the provisions on relations with 
third countries, notably the notions of denial of national treatment and comparable 
effective market access as contained in Article 9 paras 3 and 4 of the second banking 
directive2. Identical provisions are included in the corresponding directives on insurance. 
As these same notions also govern relations with third countries in the investment 
services field, that explanation is not repeated in this report. 
2. Coverage of the report 
The Commission has decided to use the occasion of the report on treatment given to 
Community investment firms, also to update the 1992 report covering credit institutions 
and insurance companies. This update is based on developments which have taken place 
in the financial services sector of the 24 countries covered by the report3. 
Art. 7 para 3 of Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities 
field (OJ no L 141 of 11.6.1993, p. 27). 
Second Council Directive of 15 December 1989 on the coordination of laws, regulations and 
administrative provisions relating to the taking up and pursuit of the business of credit institutions and 
amending Directive 77/780/EEC (OJ. L 386 of 30/12/90, p. 7). 
Argentina, Australia, Brazil, Canada, Chili, China, Egypt, Hong Kong, India, Indonesia, Japan, Korea, 
Malaysia, Mexico, Philippines, Russia, Singapore, South Africa, Switzerland, Taiwan, Thailand, 
Turkey, United States, Venezuela. 
While the report is selective in terms of the countries covered, inclusion, or indeed, non-
inclusion of any particular country should not be interpreted as having implications for 
the treatment granted in any such country for Community credit institutions, insurance 
companies and securities firms. The principal criterion followed by the Commission has 
been the relative importance of the financial sector of the countries for the European 
Community's own operators, a situation which will obviously change as markets develop 
and grow. Account should also be taken of the extent to which an EC presence has been 
established in a third country market despite the existence of restrictions. The 
Commission reserves the right to make further reports in the light of new information, as 
of course it is empowered to do under Community law. In so doing, the Commission 
will continue to carry out its obligations in a transparent manner, through dialogue with 
the countries concerned and, where appropriate, by negotiation, and in a manner which 
fully reflects the Community's commitment to pursuing a liberal policy of openness to 
competition in the financial sector. 
3. Developments since the 1992 report 
Within the European Community : with the adoption of the Investment Services 
Directive on 10 May 1993 the foundation was completed for a single market in financial 
services in banking, insurance and investment services The investment Services 
Directive actually enters into force on 1 January 1996. For credit institutions the 
legislation took effect on 1 January 1993 and for the insurance sector on 1 July 1994. 
Efforts are now concentrating on consolidating the single market and on reinforcing it. 
cf. Chapter II. 
Multilaterally : the European Community and its Member States participate actively in 
the continuing negotiations on financial services in the framework of the GATS (General 
Agreement on Trade in Services) negotiations. The European Community and its 
Member States have offered to bind its regime of open access and operating conditions 
based on national treatment on an MFN basis, cf. Chapter III. 
Bilaterally, agreements containing provisions inter alia on financial services have entered 
into force with a number of non-member countries4. These agreements though not 
strictly speaking negotiated under the third country provisions of the European 
Community directives on financial services, have market opening objectives similar to 
those set out in the directives. They thus aim to achieve national treatment in the right of 
establishment and carrying on of activities in the country concerned. Full achievement of 
these objectives will however be on a progressive basis. 
4. Enlargement - EFTA 
Since the 1992 report, the European Community has been enlarged with Austria, Finland 
and Sweden. Although these new Member States received transitional periods in a 
limited number of areas to implement Community law, none of the provisions covered by 
these exemptions affect the conditions of access of third country financial institutions to 
Austria, Finland and Sweden. These countries have traditionally pursued liberal policies 
in financial services. This is reflected in the statistics which show a presence of foreign 
The so-called Europe Agreements have all entered into force and cover Polan, Hungary, the Czech 
and Slovak Republics, Bulgaria and Romania. 
financial companies above the average of the Union at twelve as well as in the amount of 
assets held by these foreign financial companies in Austria, Finland and Sweden. 
The European Free Trade Area - EFTA - countries which are signatories to the agreement 
with the European Community establishing the European Economic Area which took 
effect on 1 January 1994 (Iceland, Liechtenstein and Norway) apply Community 
legislation relevant to financial services subject in a limited number of cases to a 
relatively brief transitional period. Iceland and Liechtenstein for instance are allowed to 
maintain restrictions on direct investments until 1 January 1996. 
Annex A : Text of Article 7 of the Investment Services Directive 
CHAPTER II - The European Single Market in Financial Services 
1. Introduction 
The financial services sector is of considerable importance to the EC economy. In 
1992, the sector were estimated in 5.1% of EC output5 (around 300 trn. of ECU). 
Between 1980 and 1989 employment in the sector rose an annual average increase of 
3.2%. By 1992, the employment6 in the financial sector were estimated in 3% of total 
employment in the EC. In 1991, outward EC direct investment7 in financial services 
accounted for 32% of the total extra EC investment. 
In 1993, total assets of credit institutions in the EC8 were estimated in 10,7579 bn of 
ECU equivalent to 195% of EC's GDP. Total deposits of credit institutions in the EC 
were estimated in 9,794 bn of ECU (178% of EC's GDP). In 1992, EC total 
insurance premiums were 33410 bn of ECU or 6.2% of EC's GDP. This represented 
963 ECU off premiums per capita. In 1994, turnover in equity shares in the main EC 
stock markets reached 2,183n bn of ECU (37.8% of EC's GDP). In the same period, 
market capitalisation were 2,31412 bn of ECU (40.1% of EC's GDP). The number ogf 
companies with listed shares in the main EC stock markets were 5,781 .v 
The European common market in financial services is therefore an essential and 
economically crucial part of the frontier-free single market of 348 mn people. The 
single market in financial services is designed to remove barriers to the free and open 
provision of financial services whether in the form of restrictions on the right of 
establishment or obstacles to the provision of services across the frontiers of the 15 
Member States which make up the European Community. 
2. Access to the European Community by third country financial institutions 
The European Community pursues a liberal policy in its relations with third 
countries in the financial services sector, as regards access to its markets and as 
regards the conditions in which financial firms originating in third countries 
established in the Community may operate. This was described fully in the 1992 
report and is only represented in summary form here. 
5 Estimation based in the gross value added at market prices, SEC-2 database EUROSTÀT. 
6 Estimation based in SEC-2 database, EUROSTAT. EU = 11. No information for GR. 
7 Source : Direct investment in the EC. EUROSTAT. 
8 EU = 12 countries. 
9 Source : IMF Statistics. 
10 Source : SIGMA. 
11 Source : European Stock Exchange Statistics. 
12 idem 8). 
The Community is aware of the importance of open markets for the development and 
liquidity of its financial markets; it also believes that open competition in its 
financial markets will lead to better services, from which the whole economy would 
benefit given the central role financial services play in contributing to the efficient 
allocation of resources. 
Community policy and that of Member States in general is based on two main tenets: 
. Open market access, and in particular the right of establishment in conditions of 
national treatment : financial institutions from third countries have access to the 
Community both in the form of establishment and provision of cross-border 
services. Third country access by way of provision of cross-border financial 
services is not examined in this report. As regards establishment, third country 
firms may establish in all the Member States of the Community in the form of 
subsidiary or branch or, with very few exceptions, representative office. The 
Community's conditional offer of commitments in the context of the extended 
Uruguay Round negotiations on services would bind the present open policy of 
granting the right of establishment in whatever form to third country financial 
institutions. 
. Second, the principle of national treatment, which applies at Community level 
without exception to the operations of partly or wholly owned subsidiaries, and 
with limited exceptions as regards the primary establishment of such subsidiaries 
and the establishment and treatment of direct branches. In some cases these 
exceptions to the full application of national treatment are being phased out, and, 
in any event, they have not acted as a significant deterrent to the establishment of 
a large presence of financial firms of third countries on the EC market. 
The central concept of the single market in financial services is the single licence, 
sometimes referred to as the "single passport". The investment services directive 
established this concept for investment firms, just as the so-called third generation 
insurance directives did it for the insurance sector and the second banking directive 
for credit institutions. 
The single licence concept permits any bank, insurance or other financial services 
company, of whatever origin, incorporated in the Community to establish a branch in 
any or all of the other Member States, or to provide services to consumers in other 
Member States. 
3. Investment services 
Pursuant to the Investment Services Directive (ISD) in order to carry on business as 
an investment firm an authorisation is required by the competent authorities in its 
"home" member state (Member State of incorporation) and will thereafter be 
regulated primarily by that member state, regardless of whether the investment firm 
establishes a branch or provides services without a local establishment in another 
member state, the "host" member state. 
In line with the other financial services directives, the ISD provides for the minimum 
harmonisation of regulatory provisions throughout the Community thus creating a 
basis for the mutual recognition of authorisations by the member states. 
The types of investment business that will require authorisation are order collecting, 
execution of orders on an agency basis, dealing, portfolio management and 
underwriting, where these activities relate to securities or securities related 
instruments such as financial futures and options. Commodities and commodity 
futures are not covered. A category of "non-core" services can be provided by the 
investment firm in all member states as long as they are mentioned specifically in the 
authorisation. 
Article 7 of the ISD covers relations with third countries. Its paragraph 4 stipulates 
that whenever it appears to the Commission, either on the basis of the reports 
provided for in paragraph 3 (this report) or on the basis of other information, that a 
third country does not grant Community investment firms effective market access 
comparable to that granted by the Community to investment firms from that third 
country, the Commission may submit proposals to the Council for an appropriate 
mandate for negotiation with a view to obtaining comparable competitive 
opportunities for Community investment firms. The Council shall act by a qualified 
majority. 
Article 7 paragraph 5 stipulates that whenever it appears to the Commission, either 
on the basis of the reports referred to in paragraph 3 or on the basis of other 
information, that Community investment firms in a third country are not granted 
national treatment affording the same competitive opportunities as are available to 
domestic investment firms and that the conditions of effective market access are not 
fulfilled, the Commission may initiate negotiations in order to remedy the situation. 
Also coming into force on 1 January 1996 is the Capital Adequacy Directive 
(93/6/EEC)13 which lays down basic capital requirements for investment firms and 
fixes the ongoing risk-adjusted capital requirements for market risk incurred by 
investment firms and credit institutions on their trading portfolio. 
Work is currently under way to extend the scope of the 1985 UCITS Directive and to 
establish minimum Union-wide investor compensation in the event of the failure of 
an investment firm. 
Cfr. Annex B. 
4. Credit institutions 
The Second Banking Directive, the Annual Accounts Directive and the Own Funds 
Directive which were essential for the coming into effect of the Single Market for 
credit institutions have since been supplemented by 5 other important directives ; 
these all apply on a national treatment basis to credit institutions of whatever origin. 
13 Council Directive of 15 March 1993 on the capital adequacy of investment firms and credit 
institutions (93/6/EEC) (O.J. N. L 141, 11.6.1993, p. 1). 
The Directive on supervision of credit institutions (Directive 92/30/EEC)14 requires 
the consolidated supervision of financial holding companies and mixed activity 
holding offices which have their headquarters in the Community. 
Directive 92/121/EEC concerns the monitoring control of credit institutions. Its 
effect is to limit an excessive concentration of exposure to a single client or group of 
clients15. 
Directive 94/19/EEC establishes deposit guarantee schemes, requiring Member 
States to introduce one or more officially recognised deposit guarantee schemes 
guaranteeing up to ECU 20.00016. 
Directive 93/6/EEC is concerned with capital adequacy of investment companies and 
credit institutions for market risks17. 
Directive 91/308/EEC prohibits the laundering of criminal proceeds and establishes a 
set of measures aimed at preventing the use of the financial system for purposes of 
money laundering18. 
Cfr. Annex B. 
5. Insurance 
The principles of full home country control and a single license were completed by 
two directives (3rd non-life and 3rd life Directives19) which were adopted in 1992, 
and entered into force on 1 July 1994. 
Prior approval of premiums and systematic notification of policy conditions for all 
consumer risks are abolished. A company thus is able to market its product without 
14 Council Directive of 6 April 1992 on the supervision of credit institutions on a consolidated basis 
(92/30/EEC) (O.J. N. L 110 of 28.4.1992, p. 52). 
15 Council Directive of 21 December 1992 on the monitoring and control of large exposures of credit 
institutions (92/121/EEC) (O.J. N. L 29 of 5.2.1993, p. 1). 
16 Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-
guarantee schemes (O.J. N. L 135 of 31.5.1994, p. 5). 
17 Council Directive of 15 March 1993 on capital adequacy of investment firms and credit institutions 
(93/6/EEC) (O.J. N. L 141 of 11.6.1993, p. 1). 
18 Council Directive of 10 June 1991 on the prevention of use of the financial system for the purpose of 
money laundering (91/308/EEC) (OJ. N. L 166 of 28.6.1991, p. 77). 
19 Council Directive 92/49/EEC of 18 June 1992 on the coordination of laws, regulations and 
administrative provisions relating to direct insurance other than life insurance and amending 
Directives 73/239/EEC and 88/357/EEC (O.J. N. L 228 of 11.8.1992, p. 1 
Council Directive 92/96/EEC of 10 November 1992 on the coordination of laws, regulations and 
administrative provisions relating to direct life insurance and amending Directives 79/267/EEC and 
90/619/EEC (OJ. N. L 360 of 9.12.1992, p. 1). 
needing authorisation for each market it enters. Given the sensitive nature of 
compulsory insurance, systematic notification of these types of risks is, however, 
maintained. 
Even though non-systematic notification is the general rule the possibility is not 
excluded for the competent authorities to seek information of a number of companies 
or even the whole market at the same time, if they see prudential reasons for doing 
so. What will be excluded is a legal obligation or companies to inform the 
authorities any time they market a new product. 
10 
CHAPTER III - Multilateral negotiations 
In the 1992 report the Commission concluded "that the most effective market opening 
policy and that of most benefit to the Community's financial services sector is to continue 
to use the opportunity provided by the extended Uruguay Round negotiations on financial 
services in order to remedy problems arising for Community credit institutions and 
insurance companies". 
The possibilities for addressing problems relating to market access and conditions of 
operation in a given market are still open, as a result of the decision to continue 
negotiations on financial services for up to six months into the life of the GATS. 
The extended GATS negotiations on financial services are scheduled to terminate on 30 
June 1995. They have reached a delicate stage. The Community and its Member States 
are as committed as ever to a successful outcome and reiterated their position in a 
submission to the Committee on Trade in Financial Services on 22 March 1995. 
The following is the text of the Communication by the European Communities and their 
Member States to the GATS Committee on Trade in Financial Services, submitted on 22 
March 1995 : 
"Commitments in Financial Services 
At the meeting of the Interim Group on Financial Services on 3 February 1995, the 
Chairman invited participants to indicate in writing their contribution to the ongoing 
negotiations for improved commitments. 
The European Communities and their Member States confirm their readiness to maintain 
in full their Schedule of Specific Commitments of 15 April 1994 (GATS/SC/31). They 
remain committed to bind a regime of open access and operating conditions based on 
national treatment on an MFN basis provided, however, significantly improved 
concessions on an MFN basis are obtained from other trading partners. 
The schedule binds the whole of the financial services sector. It represents more than a 
standstill, and offers a multilateral guarantee of a very substantial degree of liberalisation. 
The European Communities and their Member States further wish to drawn the attention 
to the following important characteristics of their commitments : 
the schedule, which was fully maintained at the conclusion of the Uruguay Round 
and has been applied in full since 1 January 1995 guarantees direct access in non­
discriminatory conditions and in any form of commercial presence whether 
subsidiary, direct branch or representative office ; 
subsidiaries of foreign banks, insurance companies and securities firm wherever 
they may be incorporated in the European Community, enjoy in full the benefits of 
the European Community's single market in financial services and in particular of 
the "single licence" or single passport". This will permit them to provide cross-
border services and open branches throughout the countries of the European 
Community ; 
11 
the commitments also provides for the freedom of Community resident companies 
and individuals to carry out outside the Union activities and transactions in all 
financial services sectors. 
In addition, with the enlargement of the European Community to 15 Member States so as 
to include Austria, Finland and Sweden, the advantage of the internal market regime and 
single license has even been expanded. Since the conclusion of the Uruguay Round 
negotiations, market opportunities for our trading partners have hereby substantially 
increased. 
The Communities and their Member States have in their legislation a number of 
measures making access to their markets dependent on reciprocal possibilities in third 
country markets. The Communities and their Member States have offered to forgo use of 
those measures subject to a satisfactory outcome of the negotiations. For this reason they 
have so far refrained from seeking an MFN exemption which would be necessary if such 
measures were to be applied to GATS members. A final decision to maintain such an 
approach, which will in itself constitute significant liberalisation, will depend on the level 
of improved commitments and balance of benefits which will be obtained at the end of 
the negotiating period. Among the factors to be taken into account when the decision is 
taken will be the extent to which it has been possible to achieve : 
non-discriminatory commitments from other parties in regard to market access in 
particular the right of establishment in all forms of commercial presence, and with 
regard to service supply through the other modes of delivery 
national treatment with regard to operational conditions 
There have been some encouraging signs of progress : indications have been given of 
bank reform and changes in the regulatory regime in the insurance sector and securities. 
Some important bilateral initiatives have been concluded. These need to be confirmed on 
a MFN basis as part of an improved package of commitments. 
As provided for in the Ministerial decision to continue negotiations, the European 
Communities and their Member States retain the right to modify their level of 
commitments by withdrawing commitments and introducing exemptions from the MFN 
obligation, if the outcome of the ongoing negotiations is unsatisfactory. 
There is only a short time left in which to complete the negotiations. Unless there are 
substantial moves resulting in improved liberalisation and these are multilateralised 
before the end of the negotiating period, it will be very difficult for the EC and their 
Member States to confirm their very open regime on a MFN basis." 
12 
CHAPTER IV - Treatment of EC securities firms, credit institutions and insurance 
companies in third countries - findings and conclusions 
Overview 
The Commission's examination of the treatment of EC securities firms, credit institutions 
and insurance companies in the countries covered by this report provides evidence of a 
wide variety of regimes. Since the 1992 report important developments have taken place 
in several countries some of which have improved access and operation conditions for 
EC financial services companies. In some cases domestic liberalisation programmes 
continue to be implemented on a progressive basis. 
The Commission again notes as in 1992 that an assessment of the treatment granted by 
the third countries to Community financial services companies is difficult to make in 
general terms. It is necessary to consider each country individually. 
However, some generalisations can usefully be made. Firstly, in the markets of the main 
developed countries20, and some developing countries with established financial services 
markets, i.e. markets which provide 80-85% of the world's financial services business; 
the difficulties encountered by Community practitioners tend not to be the result of the 
failure to receive "national treatment offering the same competitive opportunities as are 
available to domestic operators". Few if any of those markets provide examples of 
economically significant denials of national treatment. There are, however, a number of 
instances of a lack of effective market access. "Effective market access" has not been 
given a definitive interpretation and therefore needs to be assessed on an empirical basis : 
clearly, an embargo on new market entrance, geographic restrictions or sectoral 
segmentation mean that this condition laid down in the EC directives is not fulfilled. 
Secondly, in a number of markets of growing importance in the developing world 
significant denials of national treatment are more prevalent, both in relation to the right 
of initial establishment and to the carrying on of activities for established firms. 
Thirdly, in recent years the concept of "progressive national treatment" and/or market 
access has developed. The concept is based on the premise that some countries' financial 
services sector may find difficulty in confronting the competitive forces generated by the 
sudden introduction of a policy of full national treatment. Time may be needed to adjust. 
It has been used in the context where countries such as those with economies undergoing 
fundamental change or transition and where the financial services sector is at a very early 
and sometimes delicate stage of development. 
Thus, the concept has been incorporated by the European Community and its member 
states initially in the ECrope Agreements with the countries of Central and Eastern 
ECrope and, with significant differences in the agreements negotiated with Russia and 
other republics of the former Soviet Union. The NAFTA Agreement (North Atlantic 
Free Trade Area) between the United States, Canada and Mexico provides yet another 
variant of the concept allowing Mexico to adopt a policy progressively improved market 
20 OECD, Singapore, Hong Kong. 
13 
access over time, and with the possibility of applying a safeguard mechanism in the event 
of unforeseen adverse economics or financial conditions. 
The concept has been the subject of multilateral debate in the context of the negotiations 
in financial services. The Community and its Member States have indicated that they 
would be willing use it as a basis for negotiation in appropriate cases. 
There is a wide variety in the difficulties encountered by EC firms ; difficulties also vary 
from sector to sector. Much has been written about the tendency for the financial 
services sectors - banking, insurance, investment services to merge. While this may be 
so, there are still significant differences in the policies pursued by some countries. 
Insurance in India is a state monopoly, while a more liberal policy if pursued in banking 
and investment services ; Malaysia will not allow more than 30% ownership of an 
insurance company, while 100% ownership of a banking subsidiary is still permitted; 
Differences also apply ith regard to the legal form or ownership limits for foreign market 
participants : Canada will not allow direct branching for banks, insisting on a policy of 
mandatory incorporation (though not in insurance) ; Korea, conversely, refuses 100% 
ownership of a subsidiary, but does permit direct branching. Other countries , in S E 
Asia pursue policies of new access for foreign market entrants to minority share holdings. 
14 
ARGENTINA 
Access by foreign investment firms to Argentina's securities market is allowed on a non­
discriminatory basis both as branches and subsidiaries. There are no limits on the shares 
of domestic companies which may be acquired and owned by foreign companies. For 
pension fund management, a separate company must be established. 
Foreign credit institutions are allowed to establish as subsidiaries or branches. 
Operations of foreign bank branches are limited to the value of their local capital. 
Subject to prudential supervision, foreign banks are allowed to offer new financial 
products and to engage in funding activities on a non-discriminatory basis. However, 
differences in treatment exist in Argentina in respect of state-owned and private sector 
credit institutions wherein all public sector deposits are placed with state-owned banks 
which also administer all government funds on an exclusive basis. 
In insurance, a total ban on new establishment exists which is applicable to both domestic 
and foreign firms. Foreign firms may only enter the insurance market via acquisition of 
shares of existing insurers. 
AUSTRALIA 
A general foreign investment screening requirement exists in Australia. 
As regards investment services a reciprocity test applies with regard to stock exchange 
membership. The Commission is not however aware of serious obstacles or denial of 
national treatment. 
Generally, the picture of Australian regulation of foreign credit institutions is one of non­
discrimination. Branches of foreign banks are not, however, permitted to accept retail 
deposits. Further discrimination lies in the imposition of interest withholding tax (IWT) 
on half of the interest on intra-bank borrowings by foreign bank branches. 
In certain states monopolies may limit the scope for establishment and activities for 
foreign insurance firms. 
BRAZIL 
The financial services sector is closed to new foreign entrants by virtue of the Brazilian 
constitution. Article 52 of Brazil's 1988 constitution prohibits, unless Congress 
Legislates, the establishment of new branches and subsidiaries, as well as the increase of 
foreign ownership in the capital stock of Brazilian financial institutions. Those 
prohibitions could in theory be waived pursuant to international agreements and based on 
considerations of reciprocity and national interest through simple legislation but the 
Brazilian authorities have not so far used the possibility of allowing new foreign 
establishment in the country. The new Brazilian government has declared its intention to 
liberalise the financial services market by introducing a constitutional reform into 
Congress which would lift the ban on new entry. However, this objective appears to have 
slipped down the priority list. 
National treatment is, however, granted for operations of those financial institutions 
already established in the Brazilian market. 
15 
CANADA 
Foreign investment firms are allowed access to the Canadian market but incorporation 
under federal provincial or territorial laws is required by certain provinces. However, all 
private operations are regulated at provincial level, which means 10 different sets of 
regulations governing capital requirements, operations and investment. 
In the banking sector direct branching by foreign banks is not allowed. A foreign bank 
wishing to operate in Canada must establish a Schedule II subsidiary (institutions with 
capital not exceeding CAD 750 mn). 
Access for foreign insurers is subject in law to an economic needs test, although it is 
difficult to judge its real impact. 
Reciprocity provisions apply with respect to the granting of licences for the establishment 
to provide banking, trust and insurance services. 
CHILE 
Securities may be traded through up to 100% foreign-owned subsidiaries by natural or 
legal persons engaged in brokering securities, either as stockbrokers or securities agents, 
but only stockbrokers may trade shares or derivatives on the stock exchange. National 
treatment for operations of established foreign securities firms is guaranteed by Chilean 
law. 
Chile maintains an economic needs test covering all financial services sectors. 
In banking, establishment of subsidiaries and branches is permitted. Authorisation is 
required for the acquisition of more than 10 per cent of the shares of a local bank; this is 
applied in a non-discriminatory way both to foreign and domestic banks. In general, the 
banking law (Article 30) provides for a national treatment guarantee to foreign banks. 
In the insurance sector, local incorporation as a limited company is required to provide 
insurance and reinsurance services. No direct branching is permitted. National treatment 
is broadly guaranteed for foreign insurance company already present in Chile's market. 
CHINA 
Foreign investment firms may establish representative offices but are not allowed to 
establish subsidiaries or branches. Representative offices are limited to offshore 
activities and, for stock exchange members, to transactions in "B" shares only i.e. shares 
which may only be traded outside China. 
Foreign banks may establish subsidiaries or branches in 13 economic zones. 
Establishment outside these zones may only take place in the form of a representative 
office. Investment banks are prohibited from opening branches. Foreign banks are not 
allowed to carry out business in local currency which is a denial of national treatment of 
major economic significance. 
16 
Foreign insurance companies are only allowed to establish representative offices in 
China. During an experimental period of two years branches or joint ventures of foreign 
insurance companies may be established on an experimental basis in the city of Shanghai 
where local currency business is permitted. 
With respect to all sectors, restrictive qualifications are to be met for the establishment of 
a commercial presence (e.g. minimum total assets, or 30 years previous establishment in 
insurance) and discriminatory measures apply to foreign institutions, notably as regards 
capital requirements and guaranteed funds. 
EGYPT 
Foreign investment firms have to incorporate locally to operate on the securities market. 
Foreign bank branches can accede to this market by establishing ad hoc affiliates. 
Access to the banking market is possible either through direct branching or within the 
framework of joint-ventures with a majority share holding of Egyptian capital. 
Establishment of new branches (either domestic or foreign) is conditioned by an 
economic needs test. However, 100% foreign-owned bank subsidiaries are still prohibited 
from establishing in Egypt. 
Market access has slightly improved in the field of insurance since 1990. Wholly-owned 
foreign subsidiaries can be set up in certain special "offshore" zones. However, it is not 
before 2000 that access to the whole insurance sector will be opened to joint-ventures, 
with a minority foreign share holding only. In any case, economic needs test will then 
apply. 
HONG KONG 
Foreign investment firms may establish via subsidiary branches or acquisition. Five year 
prior residency required. 
Foreign banks cannot establish subsidiaries but can acquire a controlling interest in local 
bank. Establishment of branches is based on reciprocity and requires a prior 
representative office. No similar limitations exist in the insurance sector. National 
treatment is granted for the carrying on of activities in all three sectors. 
INDIA 
With the exception of the embargo on foreign brokerage companies operating directly on 
the Indian Stock Markets, and the limitation on branching for merchant banks, the 
Commission has no evidence of denial of national treatment in the investment services 
sector. 
Despite recent major changes in the commercial banking sector EC banks cannot 
establish subsidiaries and branching is subject to reciprocity. In the "merchant" banking 
sector establishment of a branch and a majority interest in a subsidiary is permitted. 
Operation generally takes place on a national treatment basis. 
The insurance market is closed to EC insurance companies. 
17 
INDONESIA 
EC banks face a number of relatively important discriminatory restrictions in Indonesia. 
As regards establishment, banks, insurers and securities houses are all required to enter 
into joint-ventures with local institutions. Although the bank and insurance reforms that 
took place in 1992, now allow up to 80% foreign ownership (even 85% in the banking 
and securities sectors) of these joint-ventures, there is no guarantee that such levels of 
foreign participation could be maintained on the long term. Indeed, the 
"indonesianisation" policy requires that each local financial institution is under 
Indonesian control. If there is no set calendar for compulsory divestments in the banking 
sector, ministerial regulations impose that foreign partners detaining a majority 
stockholding in an insurance joint-venture should cede over a period of 20 years the 
majority control to their Indonesian partners. 
With regard to operating conditions, capital requirements for foreign institutions are 
higher than for domestic firms. Restrictions are maintained on the geographical 
expansion of foreign banks. Furthermore, a discriminatory 20% tax being levied on 
premiums paid to foreign insurance companies has been introduced in January 1995. 
JAPAN 
Japan pursues a general policy of national treatment towards foreign financial institutions 
with regard both to their establishment and to their operations. Foreign firms nonetheless 
experience serious market access problems in Japan, for several reasons. Heavy and 
conservative administrative regulation, market segmentation and the existence of close 
corporate relationships, established networks and patterns of doing business are the 
primary causes of lack of market access and penetration by foreign firms, particularly in 
the insurance sector. It is expected that this sector will experience considerable reform in 
the course of 1995. 
Japan has confirmed its commitment to a policy of deregulation of its financial sector 
over the past two years. In insurance a major revision of the Insurance Law has been 
undertaken. Introduction of a brokerage system is envisaged ; it is intended to expedite 
and simplify procedures for product approval. Some foreign exchange business 
previously reserved for banks, is now allowed for securities firms, through subsidiaries. 
Foreign banks can now have wholly-owned subsidiaries or branches operating in the 
securities business. Optionally, they may retain the 50 per cent ceiling, thus avoiding the 
need for strict segmentation of activities (firewalls), a facility not available to domestic 
operators. This has been termed "better than national treatment". The rules on traditional 
market segregation have been relaxed. Several EC requests have therefore been met by 
Japan. 
However, corporate underwriting (lead-management of corporate issues unknown for 
foreign firms), investment management services (distribution problem) and pension fund 
management (better access for investment advisory firms) remain to be addressed. 
Additional deregulatory, market-opening, measures are therefore needed in asset and 
investment management, corporate securities and to complement and complete the 
deregulatory progress in Japan to date. The US/Japan measures on Insurance and 
Financial Services will give further impetus to the market opening and deregulation 
process in a number of financial services, when implemented. It remains to be seen how 
far non-US companies will in practice benefit from these provisions. 
18 
KOREA 
In the securities sector, permission to establish branches of foreign securities companies 
is dependent on discretionary criteria decided upon by the Korean authorities. This 
policy has resulted in quantitative limitations on the number of foreign securities firms 
allowed to operate in the Korean market. Foreign securities firms may establish only 
branches, or joint ventures in which foreign shareholding cannot exceed 50 per cent but 
must be at least 40 per cent. In most instances, national treatment is granted as regards 
their operating conditions. Foreign securities firms are subject in general to the same 
restrictions on dealing as those imposed on domestic firms; thus, they cannot broke in 
unlisted stocks; they can deal in bonds only for residents, since foreigners are not allowed 
to purchase domestic bonds. Investment management and investment trust management 
are hampered by severe restrictions : limits on foreign equity participation (5%) ; 
brokering of foreign securities prohibited ; limits on Korean residents'access to foreign 
securities products. 
The most important operating restriction for foreign securities firms relates to the limits 
on foreign investment in Korean securities. Access to stock market activity is effectively 
limited by an overall limitation of 12% foreign share ownership and 3% individual 
foreign ownership of Korean companies. Foreign ownership of Korean bonds is not 
permitted. 
Access to the banking sector is possible only through branches and representatives which 
may not transact business. Foreign branches must be capitalised to a value of three 
billion won. Foreign banks wishing to establish branches must be among the top 500 in 
the world (measured by assets) and have been operating as a representative office for at 
least one year. Subsidiaries are not authorised. There is a 10% limit on foreign 
participation in existing commercial banks. Foreign participation in domestic merchant 
banks is allowed. 
Most of the difficulties experienced by EC banks in the Korean financial sector stem 
from the severe nature of the regulatory environment. Some problems result from a 
differential treatment in certain areas. Problems in the operation of foreign banks in 
Korea have been reported, affecting in particular funding in local currency, competition 
for loans to domestic enterprises and for deposits in terms of interest rates, and access to 
ATM and clearing house networks 
Korea applies criteria based on economic needs to grant new insurance licenses both to 
foreign and domestic insurers. Criteria for authorization are stringent: foreign companies 
must have 10 years experience in the home market, the total world-wide volume of 
premiums and total assets must exceed half the average of premium income and total 
assets of Korean life insurance firms (i.e., they need to have a world-wide premium 
volume of about $1.5 bn a year). 
The insurance market in Korea is very tightly controlled with only a very few newly 
authorised companies in the last twenty years. Rates and policy rules are strictly 
controlled, particularly in the non-life sector, thus reducing the level of real competition 
in the industry. 
19 
MALAYSIA 
Malaysia operates a number of important restrictions on foreign financial institutions. 
Since 1982, no new commercial banking licenses have been granted, except for restricted 
offshore activities based in Labuan. For the time being, no new licenses are given to 
insurance companies and to securities houses. As regards establishment by acquisition of 
shares, all foreign financial institutions are still restricted to minority share holdings. 
Important restrictions are maintained on the operation and expansion of foreign firms. 
These include a requirement to convert all foreign bank and insurance branches into 
subsidiaries. However, whereas existing foreign bank branches of commercial banks, 
after local incorporation, are permitted to be wholly-owned foreign bank subsidiaries; 
foreign partners of the newly incorporated insurance undertakings have to cede any 
stockholding in excess of 30% of the local firm's total equity. A two-tier regulatory 
system was introduced in December 1994 in banking, that puts local establishment of 
foreign banks at a severe disadvantage compared to local banks, because of excessive 
prudential and capital requirements, not proportionate to the activities undertaken (and 
their underlying risk). 
Although EC financial institutions are at present carrying out a relatively important 
amount of business in Malaysia, the impact of the newly imposed restrictions is likely to 
affect negatively their operations, and actually did so in the insurance sector. 
MEXICO 
Access to the Mexican market has eased since the entry into force of the NAFTA on 
1 January 1994. Foreign financial companies now have access via a US or Canadian 
based subsidiary. Establishment of branches is still not allowed. The market opening 
will take place in stages from 1 January 1994 until 1 January 2000. In the banking 
sector, the foreign market share will allowed to increase from 8% to 15%, in the 
insurance sector from 6% to 12% and in the securities sector from 10% to 20%. Several 
EC based financial services companies have already taken advantage of the new rules. 
Foreign financial services companies established in Mexico receive national treatment. 
PHILIPPINES 
Access to the Filipinos financial services market has improved, after the 1994 bank and 
insurance reforms. New licenses have been granted, though in a very limited number, for 
establishing foreign bank branches (for the first time since 1948) or wholly-owned 
insurance subsidiaries or branches. Restrictions on foreign share holding in the banking 
sector have been substantially raised from 30% to 60% of voting stock. Ceiling on 
foreign equity participation in local insurance companies have been suppressed. 
However, new establishment in all financial sectors remain subject to economic needs 
tests. 
Restrictions are still imposed on foreign financial institutions as regards branching and 
expanding activities. Furthermore, capital requirements are higher than for domestic 
financial firms. For foreign bank branches, these would vary according to the number of 
sub-branches created (up to 6), and for foreign insurance companies according to the size 
of foreign equity participation in their capital. 
20 
RUSSIA 
The Russian market is only partly open to establishment and operation of foreign 
institutions in financial services. In capital markets, no particular restrictions exist for 
foreign firms, except that securities houses cannot bid more than 10% in a Treasury 
Bonds auction. 
In the area of banking, the status quo applies. The presidential decree dated 10 June 1994 
prevents, in practice, any access for newcomers for two years by prohibiting any business 
with Russian customers. Beyond this moratorium period according to the Cooperation 
and Partnership Agreement, national treatment will be granted after five years following 
the signature. Other technical discriminations exist such as the necessity to increase the 
level of the minimum capital required for a foreign institutions or a general limit to the 
foreign capital participation in the Russian Banking System (no more than 12%). 
In insurance activities, foreign shareholding is limited to 49% of the capital in a domestic 
company (Decree of 27/11/1992). For brokerage services, access is free. The main 
objective is to reach national treatment for European operators five years after the 
signature of the agreement. 
SINGAPORE 
There are two markets : a very large offshore financial services market (which is 
characterised by a very considerable foreign presence), and the domestic market; foreign 
presence is very important on both markets. However, in the domestic market there has 
been a moratorium since 1974 on the issue of full banking licenses - to either local or 
foreign applicants, and foreign-owned licensed banks cannot branch in Singapore. 
In the area of investment services, for a wide range of activities (unit trust, sovereign 
securities, financial futures, merchant banking), foreign firms have the same rights to 
establish and offer financial products as domestic firms. However, membership of the 
Stock Exchange of Singapore has been restricted for many years to local stockbrokers. 
Access to the SES can only be obtained via a 49% acquisition of a local broker or the 
special status of "international member" which allows trading on behalf of non-residents. 
In the insurance area, for the time being no new companies (foreign or local) are being 
registered. The Monetary Authority of Singapore considers that the small domestic 
market does not justify new registration, and no discriminatory restriction on activity has 
been notified. 
SOUTH AFRICA 
South Africa's financial services sector is undergoing considerable changes. 
Liberalisation of access to the securities market is under preparation. 
In the banking sector, access is still limited at present since local incorporation is 
requested. However, new legislation will allow direct branching from end 1995. 
21 
In insurance, establishment as a locally incorporated public company is required and 
direct branching is prohibited. 
National treatment is guaranteed throughout all sub-sectors. 
SWITZERLAND 
Foreign investment firms, may establish as subsidiary or branch and operate under 
national treatment conditions. 
For establishment, operation and funding of banking activities, the Swiss government 
imposes no legal constraints on foreign banks. The banking law is based on the principle 
of reciprocity. 
Foreign insurers in the insurance sector must open an agency or a branch. Companies 
that operate both life and non-life insurance in their home countries are not allowed to 
operate life assurance in Switzerland, only non life. Life insurance companies are 
allowed to offer only a limited range of four insurance classes. Business unrelated to 
insurance is prohibited. The head office of the insurance company applying to open an 
agency or branch in Switzerland must take the form of either a joint stock company 
(Aktiengesellschaft, société anonyme) or a co-operative (Genossenschaft, société 
coopérative). A minimum of three years experience in the home country is usually 
required. A minimum share capital of the home company is required. Tariffs, general 
policy conditions and documents used in connection with certain classes of non-life risk 
are subject to prior approval. For non-life, the technical reserves of the Swiss portfolio 
have to be covered by tied assets. For life, branches and agencies must establish an 
organisation fund in Switzerland, the amount of which is determined by the insurance 
authority and must be represented in liquid assets. 
TAIWAN 
Foreign companies operating in the ROC's securities market still experience 
discriminatory treatment which restricts several areas of commercial activity. 
Since the 1992 report, conditions of access to the ROC's banking market have improved 
considerably. However, entry into the ROC's banking markets is still restricted to 
branches and representative offices. Wholly owned subsidiaries are prohibited. 
Moreover, a foreign institutional investor may only hold up to 5% of the total issued 
stock of a listed company. Some' of the operational restrictions which currently exist, 
such as capital movement, act as a deterrent for foreign banks. 
At present, no Community companies are operating in the ROC's insurance market. It is 
therefore not possible to comment on treatment received. 
THAILAND 
In the field of securities, no new license is delivered; the purchase of a minority stake in 
an existing securities firm (49%) or in a finance house (25%) remains the only market 
access possibility for newcomers. With regard to conditions of operations of existing 
firms, Thailand will suppress the separate licensing requirement imposed on securities 
firms which want to expand in other capital market activities than their initial one: 
additional licenses would be granted automatically upon request. 
22 
In spite of recent liberalisation plans in the banking sector, Thailand still imposes major 
restrictions to the establishment of EC financial institutions. Currently, there is no access 
for new entrants (either domestic or foreigners) to the Thai commercial banking sector, 
except, to a very limited extent, if granted authorisation to convert a BIBF or PIBF 
offshore branch license into a full onshore branch license. Foreign participation in Thai 
banks remains limited to a 25% share holding. Conditions of operations of EC banks 
would improve if the current prohibition on the creation by foreign banks of sub-branch 
networks is effectively lifted as announced in the financial services master plan presented 
in March 1995. 
In the insurance sector, no new license is delivered and foreign participation in local 
insurance companies is capped at 25%. However, the Ministry of Commerce plans to 
introduce an amendment to the existing insurance law, that will raise the existing ceiling 
on foreign equity participation from 25% to 49% and authorise foreign insurance 
companies to set up branches in Thailand. 
TURKEY 
Foreign investment firms cannot branch directly or establish a representative office. 
Establishment of subsidiaries is subject to an economic needs test. Once established 
foreign securities firms can carry out activities on a national treatment basis. 
Foreign banks may establish a subsidiary or a branch. Once established they operate 
under national treatment conditions. 
Foreign insurance companies may establish a subsidiary or a branch. With few 
exceptions such as compulsory traffic insurance for public sector vehicles foreign 
insurance companies are granted national treatment for the carrying on of activity. 
UNITED STATES 
In the financial services sector, the United States has traditionally welcomed foreign 
investment and pursued a policy based on the application of national treatment to foreign 
firms. National treatment is normally provided at the Federal level with only a few 
exceptions, mostly not significant. A national treatment policy is also normally pursued 
at the state level, although a number of states maintain restrictions including reciprocity 
requirements on foreign firms, especially in the banking and insurance area. In a number 
of instances, some grandfathered foreign banks have been exempted from certain 
restrictions applied to US banks, such as their ability to maintain securities subsidiaries 
under the International Banking Act of 1978. 
The most important restrictions faced by Community financial institutions stem from 
non-discriminatory regulations which limit the scope of permissible activities to banks or 
which prevent the combination of banking and securities activities within the same 
banking organisation, or which limit the ability of banks to expand across state borders. 
Although these restrictions have been progressively relaxed in a number of ways, they 
may still prevent Community banks affiliated in the Community with insurance 
companies, securities firms or industrial companies to set up respectively banking and 
insurance or securities operations in the US. In cases where an EC insurance company 
having operations in the US becomes affiliated outside the US with a bank also having 
operations in the US, the resulting banking organisation would be obliged to divest either 
23 
its banking or insurance operations. There have in practice been a number of cases where 
European companies/banks have been required by the US authorities to cease carrying on 
certain types of business. 
The restrictions on the geographical expansion of banks were eased in 1994. To a 
significant extent, the impact of the "Interstate Banking and Branching Act" will depend 
upon the actions taken by the federal bank regulatory agencies in interpreting and 
implementing the Act's provisions. Individual state decisions will impact these 
provisions. They should be non-discriminatory. 
VENEZUELA 
Access to the Venezuelan financial services market has been significantly liberalised over 
the past few years through the adoption of new legislation. However, access for foreign 
banks and insurance companies is based on reciprocity. New entrance of foreign 
financial firms into the securities market is possible through the acquisition of domestic 
banks or other financial institutions, de novo establishment of investment banks and 
universal banks, as well as investment companies, and through direct branching. 
In both, the banking and the insurance sectors establishment of a new commercial 
presence may take the form of a subsidiary or branch ; acquisition of domestic banks or 
insurance companies is also permitted. 
Already established foreign financial institutions are generally granted national treatment 
as regards their operations. 
24 
Action under Article 7(4) or 7(5) of the Investment Services Directive (and 
corresponding provisions of the second banking directive and the insurance 
directives) 
The Commission has examined the possibility of action under the directives. Its 
conclusions are the following. 
Article 7(4) 
Even in countries where Community investment firms, credit institutions and insurance 
companies have acquired a significant market share in either absolute terms or relative to 
the market share acquired by other countries. There are very few cases where 
Community institutions enjoy effective market access comparable to that granted by the 
Community to third countries. Very few countries allow comparable flexibility for both 
securities banking and insurance in the terms of access to its market, and the form which 
establishment may take (branch, subsidiary, representative office or acquisition of 
holding) the same degree of freedom to expand geographically and the same range of 
activities or variety of financial products. 
Thus, several countries apply non discriminatory regulations which restrict the operations 
and freedom to compete of financial institutions ; these may include limitations on 
geographical expansion, restrictions on the financial activities which may be carried out 
or segmentation of activities, in particular between banking, securities and insurance ; 
other examples are cases where the type of financial products which are permitted may be 
limited or the introduction of new products may be subject to restriction or a lengthy 
approval process. 
The Commission would therefore be in a position to submit a proposal to the Council for 
a mandate to negotiate with a view to obtaining effective market access comparable to 
that granted by the Community to securities firms, credit institutions and insurance 
companies from that third country. The Commission has however concluded that such a 
proposal for a mandate would at the present time be redundant. As mentioned earlier the 
Community and Member States are engaged in multilateral negotiations which aim, at 
least in part, at achieving greater competitive opportunities for Community financial 
firms. In the Commission's view no useful purpose would be served by seeking at this 
moment a separate mandate to negotiate to the same end under the financial services 
directives. The Commission will continue its informal contacts at both political and 
official level with the authorities of the relevant countries to reinforce its efforts in the 
GATS context. The Commission does, however, reserve the right to "submit proposals 
to the Council for the appropriate mandate for negotiation with a view to obtaining 
comparable competitive opportunities for Community investment firms/credit 
institutions/insurance companies". Exercise of this right will be on an individual country 
by country basis and will inter alia take account of the results of the extended GATS 
negotiations on financial services due to be concluded by 30 June 1995. 
25 
Article 7(5) 
Similar considerations apply with regard to action under Article 7(5). 
Article 7(5) (and the corresponding provisions of the second banking directive and the 
insurance directives) provides that where Community investment firms do not receive 
national treatment and the conditions of effective market access are not fulfilled, the 
Commission may initiate negotiations in order to remedy the situation. 
In virtually every case21, the countries examined by the Commission in drawing up this 
report are participating in the current round of extended negotiations on financial services 
agreed as part of the Uruguay Round package in December 1993. 
The Community's negotiating objectives include elements such as better market access 
and national treatment guarantees in the provision of cross border services, not contained 
in the third country provisions of the financial services directives. However, better 
guarantees of market access and national treatment with regard to establishment and 
carrying on activities within another country constitute, perhaps, the major overall 
negotiating objective. In that respect, the Community will need to be satisfied that the 
results of the negotiations achieved by 30 June 1995 must represent a significant 
improvement compared with the situation at the end of December 1993. Unless this 
condition is met, the maintenance of the Community's current negotiating offer, including 
the offer to forgo application of the possibility to limit or suspend the right of 
establishment of third country financial services firms in the Community should not be 
taken for granted. The option to seek an MFN exemption and to continue to invoke the 
powers of limitation and suspension remains open. 
CONCLUSION 
The Commission therefore concludes that the Community and Member States must 
continue to pursue their market opening policy through the GATS negotiations on 
financial services. The Commission will continue to monitor progress of the negotiations 
in close consultation with the Member States. This is entirely consistent with the third 
country provisions of the directives which place a firm emphasis on achieving market 
opening through a process of negotiation. An assessment of the final results will be 
prepared and presented to the Council. That assessment will also include an examination 
of the implications of the negotiated results for the future application of the third country 
provisions of the financial services directives. 
21 Taiwan and China have not participated in the Uruguay Round. However, Taiwan and China have 
applied to become WTO members, which necesserily requires membership of GATS too. 
26 
ANNEXA : art. 7 of ISD 
1. The competent authorities of the Member States shall inform the Commission : 
(a) of the authorisation of any firm which is the direct or indirect subsidiary of a 
parent undertaking governed by the law of a third country ; 
(b) whenever such a parent undertaking acquires a holding in a Community 
investment firm such that the latter would become its subsidiary. 
In both cases the Commission shall inform the Council until such time as a committee 
on transferable securities is set up by the Council acting on a proposal from the 
Commission. 
When authorisation is granted to any firm which is the direct or indirect subsidiary of 
a parent undertaking governed by the law of a third country, the competent authorities 
shall specify the structure of the group in the notification which they address to the 
Commission. 
2. The Member States shall inform the Commission of any general difficulties which 
their investment firms encounter in establishing themselves or providing investment 
services in any third country. 
3. Initially no later than six months before this Directive is brought into effect and 
thereafter periodically the Commission shall draw up a report examining the 
treatment accorded to Community investment firms in third countries, in the terms 
referred to in paragraphs 4 and 5, as regards establishment, the carrying on of 
investment services activities and the acquisition of holdings in third-country 
investment firms. The Commission shall submit those reports to the Council together 
with any appropriate proposals. 
4. Whenever it appears to the Commission, either on the basis of the reports provided 
for in paragraph 3 or on the basis of other information, that a third country does not 
grant Community investment firms effective market access comparable to that 
granted by the Community to investment firms from that third country, the 
Commission may submit proposals to the Council for an appropriate mandate for 
negotiation with a view to obtaining comparable competitive opportunities for 
Community investment firms. The Council shall act by a qualified majority. 
5. Whenever it appears to the Commission, either on the basis of the reports referred to 
in paragraph 3 or on the basis of other information, that Community investment firms 
in a third country are not granted national treatment affording the same competitive 
opportunities as are available to domestic investment firms and that the conditions of 
effective market access are not fulfilled, the Commission may initiate negotiations in 
order to remedy the situation. 
27 
In the circumstances described in the first subparagraph it may also be decided, at any 
time and in addition to the initiation of negotiations, in accordance with the procedure 
to be laid down in the Directive by which the Council will set up the committee 
referred to in paragraph 1, that the competent authorities of the Member States must 
limit or suspend their decisions regarding requests pending or future requests for 
authorisation and the acquisition of holdings by direct or indirect parent undertakings 
governed by the law of the third country in question. The duration of such measures 
may not exceed three months. 
Before the end of that three-month period and in the light of the results of the 
negotiations the Council may, acting on a proposal from the Commission, decide by a 
qualified majority whether the measures shall be continued. 
Such limitations or suspensions may not be applied to the setting up of subsidiaries 
by investment firms duly authorised in the Community or by their subsidiaries, or to 
the acquisition of holdings in Community investment firms by such firms or 
subsidiaries. 
6. Whenever it appears to the Commission that one of the situations described in 
paragraphs 4 and 5 obtains, the Member States shall inform it at its request : 
(a) of any application of the authorisation of any firm which is the direct or indirect 
subsidiary of a parent undertaking governed by the law of the third country in 
question ; 
(b) whenever they are informed in accordance with Article 10 that such a parent 
undertaking proposes to acquire a holding in a Community investment firm such 
that the latter would become its subsidiary. 
This obligation to provide information shall lapse whenever agreement is reached with 
the third country referred to in paragraph 4 or 5 or when the measures referred to in 
the second and third subparagraphs of paragraph 5 cease to apply. 
7. Measures taken under this Article shall comply with the Community's obligations 
under any international agreements, bilateral or multilateral, governing the taking up 
or pursuit of the business of investment firms. 
28 
ANNEX B 
Developments in the Single Market in Financial Services 
INVESTMENT SERVICES 
The foundations were laid for a European securities market by a series of directives 
adopted mainly during the 1980s which provide for common requirements on the 
financial information required for stock exchange listing (Directive 79/279/EEC), and on 
the information to be published regularly by listed companies (Directive 82/121/EEC). 
Common rules have also been adopted on the prospectus for admission to listing 
(Directive 80/390/EEC) with mutual recognition of that listing prospectus (Directive 
87/345) so that multiple listings will be greatly facilitated. These measures are designed 
to help companies treat the Union as a single market to obtain a stock exchange listing 
after equities and bonds have been issued. 
Complementing these proposals the Commission secured the adoption of a directive 
(89/298/EEC) which sets common standards for the prospectus required on the issue of 
securities to the public. 
Increased transparency of securities markets and improved investor confidence in the 
fairness of their operations (particularly with respect to take-overs and other price 
sensitive information) were also the objective of directives on the publication of 
information when major holdings of a listed company are acquired or disposed of 
(Directive 88/627/EEC) and on the curbing of insider trading across the Union 
(Directive 89/592/EEC). 
The "UCITS" directive (Directive 85/611/EEC, as amended) came into effect in October 
1989. This directive allows units of undertakings for collective investment in 
transferable securities to be marketed throughout the Union, subject of course to their 
compliance with the minimum standards set in that instrument. 
A single market for investment intermediaries will exist as from 1 January 1996 with the 
entry into force of the Investment Services Directive (93/22/EEC). This will enable 
broker/dealers and other investment firms to establish branches and provide services 
throughout the Union on the basis of their home State authorisation and under home State 
supervision. 
Coming into force at the same time, the Capital Adequacy Directive (93/6/EEC) lays 
down basic capital requirements for investment firms and also fixes the ongoing risk-
adjusted capital requirements for market risk incurred by investment firms and credit 
institutions on their trading portfolio. 
Work is currently under way to extend the scope of the 1985 UCITS Directive and to 
establish minimum Union-wide investor compensation in the event of the failure of an 
investment firm. 
29 
Section A 
Section B 
Section C 
30 
BANKING 
A first banking co-ordination Directive of 1977 (Directive 77/780/EEC) achieved two 
main goals. First, it cleared away most of the obstacles to freedom of establishment of 
banks and other credit institutions and secondly, it laid down common standards for the 
granting of banking licences. 
It is however the second Banking Co-ordination Directive (Directive 89/646/EEC) which 
is the cornerstone of the single market in financial services. This Directive provides for a 
single banking licence, valid throughout the Community, which will authorise a bank or 
credit institution established in one Member State to supply its services throughout 
ECrope either by establishing branches in other Member States or by the provision of 
cross-frontier banking services to customers in other Member States. This licence will be 
mutually recognised by other Community banking supervisors in all other Member 
States. 
Not only will the single banking licence require Member States to recognise and permit 
traditional services, it will also require mutual recognition of some banking services or 
activities which may not traditionally have been associated with banking per se (such as, 
for example, trading in securities). The Directive provides that the following range of 
banking activities be permitted and mutually recognised by the authorities of all the 
Member States: 
1. Acceptance of deposits and other repayable funds from the public. 
2. Lending (including, inter alia, consumer and mortgage credit, factoring with or 
without recourse, financing of commercial transactions including forfeiting). 
3. Financial leasing. 
4. Money transmission services. 
5. Issuing and administering means of payment (e.g. credit cards, travellers' cheques 
and bankers' drafts). 
6. Guarantees and commitments. 
7. Trading for own account of for account of customers in: 
a) money market instruments (cheques, bills, CDs etc.) 
b) foreign exchange 
c) financial futures and options 
d) exchange and interest rate instruments 
e) transferable securities. 
8. Participation in share issues and the provision of services related to such issues; 
9. Advice to undertakings on capital structure, industrial strategy and related questions 
and advice and services relating to mergers and the purchase of undertakings. 
10. Money broking. 
31 
11. Portfolio management and advice. 
12. Safekeeping and administration of securities. 
13. Credit reference services. 
14. Safe custody services. 
Three other Directives were prerequisites for the completion of the single market in the 
banking sector, namely the previously adopted Directive on Annual Accounts and 
Consolidated Accounts (Directive 86/63 5/EEC), the Directive the Own Funds of credit 
institutions (Directive 89/299/EEC) and the Directive on Solvency Ratio (Directive 
89/647/EEC). 
The Accounts Directive sets out special rules applying the general provisions on the 
annual accounts of joint-stock companies (fourth and seventh Company Law Directives) 
to the banking sector. The Directive requires credit and financial institutions to publish 
harmonised statements of their economic and financial situation with results in the form 
of a balance sheet, profit and loss account, financial report and corresponding annex at 
the end of each financial year. In order to ensure the comparability of annual accounts 
and hence, the information provided to creditors, debtors and shareholders, the Directive 
provides for harmonisation of the layout of balance sheet and profit and loss account 
items, nomenclature, terminology and valuation rules. 
The Directive on Own Funds adopted in 1989 provided for a minimum degree of 
harmonisation of Member States' rules on own funds. It sets out the items attributable to 
own funds, distinguishing between original own funds and additional own funds of lesser 
status. Thus, subject to a number of conditions set out in the Directive, own funds 
comprise paid-up capital reserves, funds for general banking risks, value adjustments, the 
commitments of the members of credit co-operatives, cumulative preferential shares and 
subordinated loan capital. Additional own funds must not exceed the amount of original 
own funds. The Directive specifies sample criteria for particular items of own funds, 
leaving the Member States free to apply stricter criteria if they see fit. 
The Directive on own funds is central to the Directive on solvency ratio which 
establishes common definitions and methods for their calculation based on 8% minimum 
for the solvency ratios. Both of these Directives have taken account of the work of the 
Committee on Banking Regulations and Supervisory Practices of the Bank for 
International Settlements, Basle. 
There are five other important Directives. The first is the Directive on the supervision of 
credit institutions (Directive 92/30/EEC) which requires the consolidated supervision of 
financial holding companies and mixed activity holding offices which have their head-
offices in the Community. The second, Directive 92/121/EEC, is concerned with the 
monitoring control of credit institutions. Its effect is to limit an excessive concentration 
of exposures to a single client or group of clients. Thirdly, Directive 94/19/EC, which is 
concerned with deposit guarantee schemes,, requiring Member States to introduce one or 
more officially recognised deposit guarantee schemes guaranteeing up to ECU 20,000. 
Fourthly, Directive 93/6/EEC is concerned with the capital adequacy of investment 
companies and credit institutions for market risks. And finally, Directive 91/308/EEC 
which prohibits the laundering of criminal proceeds and establishes a set of measures 
32 
aimed at preventing the use of the financial system for the purposes of money laundering. 
This Directive ensures active co-operation between credit and financial institutions and 
the law enforcement authorities by lifting requirements of professional confidence in 
order to achieve its objective. 
INSURANCE 
In 1961 an ambitious programme to realise the freedom of establishment and the freedom 
to provide service was adopted in the field of insurance. 
In 1964 a directive was adopted removing the barriers to establishment and provisions of 
services in reinsurance. Reinsurance was subject to little control in the then six Member 
States and the directive did little more than confirm the existing situation in the Member 
States entailing no harmonisation of national rules. 
1st Generation Directives 
The next generation of directives (the so-called 1st generation directives) i./e. the first 
non-life (73/239/EEC). and the first life (79/267/EEC) concerns the freedom of 
establishment in direct insurance. 
In order to implement this freedom, Member States had to agree to a number of basic 
principles, which were laid down in the directives. 
Thus, an insurance company seeking to start business needs a prior authorisation from the 
national authorities for each particular class of business. This authorisation is only 
granted subject to a series of precise conditions laid down in the directives. 
As regards technical reserves and assets, these directives do not contain any detailed rules 
of harmonisation. Harmonisation only takes place as regards the goal to be achieved, i.e. 
Member States are only required to ensure that the undertaking will establish sufficient 
technical reserves, to be covered by equivalent and matching assets localised in each 
country where the business is carried out. Here - and the same goes for general and 
special policy conditions - the Member States were allowed to maintain their national 
rules. Thus, the establishment directives maintained a regime of host country control. 
The effect of the establishment directives was largely to confirm the existing situation of 
twelve separate, compartmentalised markets allowing countries to maintain their 
prudential regulatory framework. 
2nd Generation Directives 
The approach taken in the so-called 2nd generation of directives the 1988 non-life 
services directive (90/619/EEC) combined elements of both home country and host 
country control. 
Following a judgement by the European Court of Justice in 1986, both directives make a 
distinction between policyholders who do not need special protection when dealing with 
an insurance company from another Member State and those policyholders who do. In 
non-life insurance the first category can be summed up as large industrial, commercial or 
33 
professional clients who can look after themselves (large risks). In life insurance it 
concerns policyholders who take the initiative to enter into contact with an insurance 
undertaking. For these two types of policyholder Member States agreed that they would 
mutually recognise each others systems without any further harmonisation of, in 
particular, financial control regulations. For other policyholders, however, in line with 
the Court's ruling, existing host country rules continued to be applied pending further co­
ordination as to technical provisions, assets covering these technical provisions and 
general and special policy conditions. A limited harmonisation was realised as regards, 
for instance, the choice of the applicable contract law and a cooling-off period. 
Third Generation Directives 
A true single market in the EC implies a market where insurance companies and 
intermediaries are free to operate throughout the Community either by means of 
establishment or freedom to provide services across national frontiers. Competition 
should be based on price, the nature of the product and the service offered. The public 
should be able to choose freely from a wide range of competing products and suppliers. 
Insurance companies should be subject to the same key supervisory rules ensuring 
adequate prudential control and thus consumer protection. Control should be exercised 
by the country of location of the head office, which also would issue the authorisation 
valid for the whole Community. That is : full home country control and a single licence. 
These principles were complemented by two directives (3rd non-life and 3rd life 
Directives) which were adopted in 1992, and entered into force on 1 July 1994, giving an 
insurance company authorised in one EC-country access to all 15 markets on the basis of 
a single licence (instead of 15 separate licenses) for establishment and free provision of 
services business. Financial control as of 1994 is the sole responsibility of the State of 
the head office. As regards control of products. Member States will be able to maintain 
their provisions of contract law, but these will remain subject to general principles of 
Community law as developed by the Court of Justice in Luxembourg in the above 
mentioned co-insurance cases. These will act as a filter against national regulations 
unduly restricting competition on different types of product. 
The above directives contain rules as to the responsibilities of home and host state's and 
the way they have to cooperate. These concern both the process of authorisation of a new 
undertaking and the prudential monitoring of firms in operation. They reflect the 
increased responsibilities of the home state, but do allow the host state to initiate 
procedures or, in urgent cases, intervene directly if a company acts against its justified 
legal provisions. 
The Directives do not seek full harmonisation of Member States' prudential systems and 
rules, but rather through minimum harmonisation, which is at the same time necessary 
and sufficient to lay down the prerequisite conditions which allow mutual recognition of 
what each Member State does to protect its consumers. For certain aspects of control a 
Member State is allowed to impose stricter rules on undertakings with a head office 
within its territory, that is within its jurisdiction. 
This mutual recognition is essentially brought about by a common body of rules 
concerning the calculation of technical provisions and assets covering these technical 
provisions and by allowing Member States to maintain their national contract law, 
34 
subject to the jurisprudence by the Court of Justice. Another key element of the EC 
approach is the strengthened co-operation between supervisory authorities. 
Prior approval of premiums and systematic notification of policy conditions for all 
consumer risks are abolished. A company thus is able to market its product without 
needing authorisation for each market it enters. Given the sensitive nature of compulsory 
insurance, systematic notification of these types of risks is, however, maintained. 
Even though non-systematic notification is the general rule the possibility is not excluded 
for the competent authorities to ask information of a number of companies or event he 
whole market at the same time, if they see prudential reasons for doing so. What will be 
excluded is a legal obligation or companies to inform the authorities any time they 
market a new product. 
35 
ANNEX C 
SUMMARY TABLE 
Table of Conclusions of 1995 Third Country Report. 
Country Sector Establishment Activities Acquisition 
Argentina 
Australia Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance Subsidiary, 
branch. 
Subsidiary, 
branch. 
New entrance 
prohibited. 
Problems of 
access to ASX 
(reciprocity), 
otherwise none. 
Subsidiary, 
branch. 
May be limited by 
state monopolies. National 
treatment. 
National 
treatment. 
National 
treatment. 
Foreign banks 
denied direct 
access to cheque 
clearing system; 
no access to 
central bank 
discounting 
system. IWT 
imposed on half 
the interest on 
intra-bank 
borrowings by 
foreign banks; not 
permitted to 
accept retail 
deposits. 
National 
treatment. No limits on share 
acquisition. 
No limits on share 
acquisition. 
Acquisition of 
shares in existing 
companies 
permitted. 
Foreign 
investment of 
15% or more 
involving over 
5mn is subject to 
approval. 
36 
Country Sector Establishment Activities Acquisition 
Brazil 
Canada Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance Access prohibited 
since 1988. Pre-
1988 firms are 
grandfathered. 
Access prohibited 
since 1988. 
Firms established 
pre-1988 are 
grandfathered. 
Direct branching 
is not permitted. 
Subsidiary, 
branch; 
reciprocity 
requirement. 
Direct branching 
from abroad is 
prohibited. 
Foreign banks 
must establish 
Schedule II 
subsidiary; 
reciprocity 
requirement. 
Subsidiary, 
branch, subject to 
economic needs 
test; reciprocity 
requirement. Grandfathered 
firms are subject 
to restrictions on 
expansion. 
Grandfathered 
firms are subject 
to restrictions on 
expansion. 
National 
treatment for 
established 
companies. 
Private operations 
regulated at 
provincial level. 
Competitive 
disadvantage as a 
result of having to 
operate as a 
subsidiary. 
Certain measures 
affect activity, ie., 
capital 
requirements on 
parent companies. 
. .. — Increase in 
foreign ownership 
prohibited. 
Institutional 
investors may 
hold 49% of 
shares. 
Increase in 
foreign ownership 
prohibited. 
Institutional 
investors may 
hold up to 49% of 
shares. 
Foreign 
participation 
limited to 50% of 
capital. 
37 
Country Sector Establishment Activities Acquisition 
Chile 
People's 
Republic of 
China Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance Must establish 
'corredores de 
boisa' in order to 
join the stock 
exchange; 
economic needs 
test. 
Subsidiary, 
branch, subject to 
economic needs 
test. 
No direct 
branching; 
economic needs 
test. 
May only 
establish 
representative 
offices. 
Subsidiary, 
branch within 
certain regions. 
May establish 
representative 
offices. Branch, 
joint ventures 
permitted in 
Shanghai on 
experimental 
basis. National 
treatment. 
National 
treatment. 
National 
treatment for 
established 
companies. 
Limited to off­
shore activities 
and transactions 
in 'B' shares. 
Business in local 
currency 
prohibited. 
Investment limits. Authorisation 
required to 
acquire 10%> or 
more of existing 
bank. 
38 
Country Sector Establishment Activities Acquisition 
Egypt 
Hong Kong 
India 
Indonesia Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance With approval of 
CMA. 
Branch, joint 
venture, subject to 
economic needs 
test. 
Subsidiaries in 
off-shore zones. 
National 
treatment. 
Branch, 
conditional upon 
branch and prior 
representative 
office. 
National 
treatment. 
Branch for 
merchant banks. 
Branch, subject to 
reciprocity. 
Closed. 
Only via joint 
venture. 
Only via joint 
venture. 
Only via joint 
venture. Permitted to carry 
out specified 
activities. 
Ban on 
commencement 
of new activities 
since October 
1993. 
National 
treatment. 
National 
treatment. 
National 
treatment. 
Prohibited from 
making portfollio 
investments in 
corporate firms. 
National 
treatment. 
» 
High capital 
requirements. 
High capital 
requirements. 
High capital 
requirements; may 
not insure 
government 
property; payment 
of premiums to 
foreign companies 
subject to 20% tax 
deduction on 
estimated net 
income. Maximum 49% 
ownership for 
joint ventures. 
May acquire a 
controlling 
interest. 
Limited to 51%). 
39 
Country Sector Establishment I Activities Acquisition 
Japan 
Korea 
Malaysia Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance National 
treatment. 
National 
treatment. 
National 
treatment. 
MoF approval 
required. Branch, 
joint venture 
Branch, must rank 
amont top 500 in 
world. 
Economic needs 
test. 
No new brokerage 
licences 
No new licences 
at present. 
No new licences 
at present. National 
treatment. 
National 
treatment. 
National 
treatment 
Restrictions on 
access to 
government 
funds, ownership 
of real estate, 
funding in local 
currency; access 
to ATM and 
clearing house 
networks. 
Rates and policy 
strictly controlled. 
Excessive 
prudential and 
capital 
requirements; 
controls on 
lending; no access 
to ATM network. 
Reinsurance only 
permitted if there 
is insufficeient 
capacity or 
experise in 
Malaysia. Foreign equity 
participation 
limited to 50%. 
Maximum 10% 
foreign 
participation. 
May acquire on a 
joint venture; 
maximum 30% 
shareholding at 
the beginning of 
agreement. 
Maximum 30%> 
foreign 
shareholding plus 
approval. 
Maximum 30% 
foreign 
shareholding plus 
approval. 
40 
Country Sector Establishment Activities Acquisition 
Mexico 
Philippines 
Russia Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance Only via a 
Canadian or US 
based subsidiary. 
Only via a 
Canadian or US 
based subsidiary. 
Subsidiary, 
representative 
office. 
Subsidiary, 
branch. 
Subsidiary, 
branch. 
Subsidiary, 
branch. 
No access for two 
years. 
Joint venture. National 
treatment. 
National 
treatment. 
National 
treatment. 
National 
treatment, 
generally. 
National 
treatment. 
Not permitted to 
insure 
government 
property or 
provide contract 
bonds for public 
sector companies. 
Special deposit 
requirements; 
different capital 
requirements. Maximum 40% 
foreign equity 
ownership; 30% 
of total banking 
system resources; 
60%) ownership of 
voting stock. 
May completely 
take over existing 
company. 
41 
Country Sector Establishment Activities Acquisition 
Singapore 
South Africa 
Switzerland Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance No new 
registrations. 
No new licences 
at present. 
No new 
companies being 
registered. 
Closed. 
Subsidiary, 
branch, 
representative 
office. 
As a locally 
incorporated 
public company. 
National 
treatment. 
National 
treatment. 
Branch, agency. National 
treatment. 
National 
treatment. 
National 
treatment. 
National 
treatment. 
National 
treatment. 
Only non-life if 
parent company 
operates life and 
non-life. Foreign equity 
ownership of SES 
limited to 49%o. 
Foreign 
shareholding 
limited to 40% of 
total equity. 
42 
Country Sector Establishment Activities Acquisition 
Taiwan 
Thailand 
Turkey Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance Discriminatory 
treatment restricts 
access. 
Branch, 
representative 
office. 
No EC companies 
operating. 
Seperate licences 
required for each 
activity 
undertaken. 
No new licences 
at present. 
No new licences 
at present. 
Subsidiary, 
subject to 
economic needs 
test. 
Subsidiary, 
branch. 
Subsidiary, 
branch. Limitations on 
foreign 
institutional 
investors; ban on 
individual 
portfolio 
investment. 
Considerable 
restrictions on 
activities foreign 
banks may 
perform; 
restrictions on 
capital 
movement; 
lending limits. 
Limits on 
brokerage 
activity. 
Stringent loan-to-
capital rations; 
limits on foreign 
lending. 
National 
treatment. 
National 
treatment. 
National 
treatment. Total individual 
shareholding 
limited to 5%; 
total group 
holding limited to 
15%. 
Maximum 49% 
foreign share 
ownership. 
Maximum 25% 
foreign share 
ownership. 
43 
I Country Sector Establishment Activities Acquisition 
USA 
Venezuela Securities 
Banking 
Insurance 
Securities 
Banking 
Insurance National 
treatment. 
National 
treatment; 
sectorial 
segmentation. 
National 
treatment; 
sectorial 
segmentation. 
Subsidiary, 
branch. 
Subsidiary, 
branch. 
Subsidiary, 
branch. National 
treatment. 
National 
treatment. 
In principle, 
national 
treatment. 
National 
treatment. 
National 
treatment. 
National 
treatment. 
44 

ISSN 0254-1475 
COM(95) 303 final 
DOCUMENTS 
EN 10 11 
Catalogue number : CB-CO-95-336-EN-C 
ISBN 92-77-91085-2 
Office for Official Publications of the European Communities 
L-2985 Luxembourg