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The Magnificent Seven: Exemption, Relief, Equivalence, Recognition, Substitution, Deference, Trust – Reducing Regulatory Duplication and Frictions in the Cross-Border Supply of Financial Services
Published online by Cambridge University Press: 02 January 2024
Abstract
A financial services supplier authorised in its home state that wishes to supply services cross-border into another state will, absent any relief, have in addition to meet the regulatory requirements of that host state to trade in it. Regulatory frictions including duplicative regulatory requirements are barriers to cross-border trade. This article considers certain techniques deployed to reduce such barriers, noting that trust plays a part in many of them. These techniques grant relief to incoming firms from obligations to comply with the regulatory requirements of a host state. They may take the form of unilateral arrangements, with or without any conditions. There may be assessments of equivalence as a basis for relief from compliance with the host state’s rules: deference to the home state’s regime, a basis for recognition, whether unilateral or mutual. Recognition may be given effect through a party’s domestic laws or in international law under the General Agreement on Trade in Services (GATS) Article VII. A GATS Article VII agreement can relieve regulatory frictions in the financial services sector alone as there is no requirement for “substantial sectoral coverage” as required for regional trade agreements under GATS Article V. Mutual recognition agreements for financial services in international law are, however, few in number.
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References
1 This despite the activities of the global standards-setters: the Basel Committee on Banking Supervision, the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS).
2 G Feketekuty, “Regulatory Reform and Trade Liberalisation in Services” in P Sauvé and RM Stern (eds), GATS 2000, New Directions in Services Trade Liberalisation (Washington, DC, Brookings Institution Press 2000).
3 North American Free Trade Agreement, 1994 (NAFTA), Art 1403.
4 See NAFTA, Art 1402.2 (part): “This obligation does not require a Party to permit such providers to do business or solicit in its territory.” See also Art 1402.1 for the standstill provision regarding domestic law measures for cross-border services.
6 A Mattoo “Comment” in P Sauvé and RM Stern (eds), GATS 2000, New Directions in Services Trade Liberalisation (Washington, DC, Brookings Institution Press 2000) p 320.
7 The Cassis de Dijon case: Case 120/78, Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein. See below at Section VI.1.
8 Progressing from minimum to maximum harmonisation directives and more recently to regulations. See, eg, in relation to investment services.
9 For the meaning of prudential measures, see AFS para 2 and Argentina – FS, DS 453, panel report.
10 AB Zampetti, “Market Access through Mutual Recognition: The Promise and Limits of GATS Article VII”, in P Sauvé and RM Stern (eds), GATS 2000, New Directions in Services Trade Liberalisation (Washington, DC, Brookings Institution Press 2000) pp 283–307 at 293–94.
11 But see, eg, NAFTA Chapter, Cross-Border Trade in Services, at Art 1213.1:
For purposes of this Chapter, a reference to a federal, state or provincial government includes any non-governmental body in the exercise of any regulatory, administrative or other governmental authority delegated to it by that government.
Such an inclusion of a non-governmental body within the definition of governmental bodies does not make it party to the agreement.
12 Zampetti, supra, note 10, 295.
13 See The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 SI 2001/544 (RAO), Chapter XVII Exclusions Applying to Several Specified Kinds of Activity, Art 72 Overseas persons. As examples, paras 1 and 5 of that article provide:
(1) An overseas person does not carry on an activity of the kind specified by article 14 by –
(a) entering into a transaction as principal with or through an authorised person, or an exempt person acting in the course of a business comprising a regulated activity in relation to which he is exempt; or
(b) entering into a transaction as principal with a person in the United Kingdom, if the transaction is the result of a legitimate approach.
(5) There is excluded from article 53 the giving of advice by an overseas person as a result of a legitimate approach.
14 The UK’s GATS Schedule for the Financial Services Sectors states (in part):
1. The UK undertakes commitments on Financial Services in accordance with the provisions of the “Understanding on Commitments in Financial Services” (the Understanding).
2. These commitments are subject to the limitations on market access and national treatment in the “all sectors” section of this schedule and to those relating to the subsectors listed below.
The Understanding on Commitments In Financial Services specifies classes of insurance at para 3 under the heading “Cross-border Trade”: <www.wto.org/english/tratop_e/serv_e/21-fin_e.htm> (last accessed 18 March 2023). The UK’s GATS Schedule for financial services is at <www.gov.uk/government/publications/uk-goods-and-services-schedules-at-the-wto> pp 41 and 94 (last accessed 18 March 2023).
15 RAO, Art 10.
16 Scher v Policyholders Protection Board [1994] 2 AC 57, per Lord Goff; see also Re a Company (No 007923 of 1994) (No 2) [1995] 1 BCLC 594, Ch D, Knox J; and Secretary of State for Trade and Industry v Great Western Assurance Company [1997] 2 BCLC 685, Jonathan Parker J.
17 Eg Australia–UK FTA, Annex 9A (Cross-Border Trade in Financial Services), footnote 3. The categories are:
(iii) credit and suretyship;
(iv) land vehicles;
(v) fire and natural forces;
(vi) other damage to property;
(vii) motor vehicle liability, except in relation to any liability which, in accordance with domestic law, must be insured by an insurer who is authorised under such laws;
(viii) general liability;
(ix) miscellaneous financial loss;
(x) difference in conditions and difference in limits, where the difference in conditions or difference in limits cover is provided under a master policy issued by an insurer to cover risks across multiple jurisdictions.
18 See ASIC CO 03/824 for the original Order. See also sufficient equivalence relief below.
19 ASIC Corporations (Amendment) Instrument 2022/623. Treasury Laws Amendment (Streamlining and Improving Economic Outcomes for Australians) Bill.
20 See Section V.
21 RAO, Art 51ZC.
22 See Chapter 3, National Private Placement, of the AIFM Regulations SI 2013/1773 as amended and FCA Handbook at FUND 10.5.
23 See Regulation 26 of the AIFM Regulations SI 2013 No 1773 as amended; FCA handbook at FUND 3.10 for delegation of portfolio management functions.
24 Financial Services and Markets Act 2000 Part XVIII Chapter I, ss 287, 288, 289, 292; FCA Handbook at REC 6.
25 E Tafara and RJ Peterson, “A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework” (2007) 48(1) Harvard International Law Journal 31. SEC-substituted compliance comparability assessment would contain, at a minimum, a comparative assessment of laws and regulations in some fourteen areas, including authorisation; consumer and investor protection, capital requirements, disclosure requirements and corporate governance.
26 ibid, 54. “Congress has granted the SEC considerable interpretive and exemptive authority about how many aspects of the federal securities laws should be implemented.” ibid, 52.
27 National unilateral equivalence arrangements (and the EU’s various equivalence measures) are not well evidenced in the WTO’s database as amounting to recognition arrangements under GATS Article VII. And see Section VIII.
28 ASIC Class Orders were made in respect of firms regulated by the UK’s then regulator the Financial Services Authority (CO 03/1099), US SEC (CO 03/1100), US Federal Reserve and Comptroller of the Currency (CO 03/1101), Monetary Authority of Singapore (CO 03/1102), Securities and Futures Commission of Hong Kong (CO 03/1103), US Commodity Futures Trading Commission (CO 04/829) and German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin; CO 04/1313).
29 ASIC Corporations (Amendment) Instrument 2022/623. Treasury Laws Amendment (Streamlining and Improving Economic Outcomes for Australians) Bill.
30 The Mutual Recognition Arrangement between the United States Securities and Exchange Commission and the Australian Securities and Investments Commission, together with the Australian Minister for Superannuation and Corporate Law, paras 20 and 24, Washington, DC, 25 August 2008.
31 Memorandum of Understanding concerning Consultation, Cooperation and the Exchange of Information related to Market Oversight and the Supervision of Financial Services firms, Washington, DC, 25 August 2008.
32 The regime described is that which will supersede the UK’s Temporary Recognition Regime (TRR), currently extended until 31 December 2024 (and further extendable), which allows eligible non-UK CCPs to continue to provide clearing services in the UK before recognition is granted, on conditions including application for recognition. See <www.bankofengland.co.uk/eu-withdrawal/information-on-the-effect-of-the-uks-withdrawal-from-the-eu-on-fmi-supervision> (last accessed 22 March 2023).
33 Art 25 of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, [2012] OJ L 201, 1 (EMIR, the European Markets Infrastructure Regulation) as “onshored”, ie amended by the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2020/646 Pt 4 reg.20.
34 If a Tier 1 CCP meets certain criteria, the Bank will carry out a Level 1 informed reliance assessment to determine whether it can rely on the CCP’s home authority’s regulation and supervision. The Bank of England’s approach to tiering incoming central counterparties under EMIR Article 25, Statement of Policy, June 2022, p 3 <www.bankofengland.co.uk/-/media/boe/files/paper/2022/boes-approach-to-tiering-incoming-central-counterparties-under-emir-article-25-sop-jun-22.pdf?la=en&hash=A74E9C66FC1797C14605C7A326C30AA91C75A043> (last accessed 4 April 2023). Described as to “defer its supervision in these areas to the home authorities” in The Bank of England’s approach to tiering incoming central counterparties, News release, 8 November 2021, “defer” is not used in the Bank’s Statement of Policy. The arrangement seems closer to discretionary reliance on rather than deference to the home state regulator, at least in the sense used elsewhere in this article; see <www.bankofengland.co.uk/news/2021/november/the-boes-approach-to-tiering-incoming-central-counterparties> (last accessed 4 April 2023).
35 <https://finance.ec.europa.eu/eu-and-world/equivalence-non-eu-financial-frameworks_en> (last accessed 2 April 2023).
36 <https://finance.ec.europa.eu/system/files/2017-02/eu-equivalence-decisions-assessment-27022017_en.pdf> (last accessed 31 March 2023).
37 <https://ec.europa.eu/commission/presscorner/detail/en/ip_19_4309> (last accessed 31 March 2023).
38 Memorandum of Understanding (MoU) between the Securities and Futures Commission of Hong Kong and the French Autorité des Marchés Financiers of 10 July 2017 concerning Mutual Recognition of Covered Funds, Management Companies and related Cooperation, Art 2.1.
39 ibid, Preamble, para 2.
40 ibid, Art 2.3; see Zampetti, supra, note 12.
41 See, eg, MiFID II, Directive 2014/65/EU and MiFIR, Regulation (EU) No 600/2014; EMIR, Regulation (EU) No 600/2014.
42 K Nicolaidis, “Mutual Recognition: Promise and Denial, from Sapiens to Brexit” (2017) 70(1) Current Legal Problems 4.
43 ibid, 17.
44 CETA, Art 13.2(1).
45 CETA, Art 13.5 – Recognition of prudential measures. See <https://finance.ec.europa.eu/system/files/2023-03/overview-table-equivalence-decisions_en.pdf> (last accessed 31 August 2023) for EU equivalence decisions for Canada at 11 November 2022. And cf the equivalence decisions of the EU referred to in Section V.4.
46 United Kingdom–Japan Comprehensive Economic Partnership Agreement, Chapter 8 Trade in Services, Investment Liberalisation and Electronic Commerce, Arts 8.14–8.19.
47 ibid, Arts 8.31(2) and 8.35(1).
48 UK–Japan Comprehensive Economic Partnership Annex 8-A Regulatory Cooperation in Financial Services.
49 Nicolaidis, supra, note 42, 1, 4, offers eight “takes” describing mutual recognition – not all of them positive: here, “shunned” might be the most apt.
50 And see the analysis of “prudential” in the panel report of the Argentina – FS case, DS 453.
51 P-H Verdier, “Mutual Recognition in International Finance” (2011) 52 Harvard International Law Journal 96.
52 Arts 10 and 11.
53 Art 39.
54 See <https://ministers.treasury.gov.au/ministers/nick-sherry-2007/media-releases/world-first-comprehensive-mutual-recognition-securities> and <www.fma.govt.nz/assets/Guidance/Offering-financial-products-in-New-Zealand-and-Australia-under-mutual-recognition.pdf> (both last accessed 10 April 2023).
55 Arts 4 and 11.
56 USA No. 5 (2019) at Art 3.2: “The first Party shall, as specified in the Sectoral Annexes, accept or recognize results of specified procedures, used in assessing conformity to specified legislative, regulatory, and administrative provisions of the first Party, produced by designated conformity assessment bodies and/or authorities in the territory of the second Party.”
57 Art 4.3 is specific on this point: “This Agreement shall not be construed to entail mutual acceptance of standards or technical regulations of the Parties.” Note the different position on equivalence in the Sectoral Annex for Pharmaceutical Good Manufacturing Practices.
58 See, eg, Section VII, para 5 of the Sectoral Annex for Electromagnetic Compatibility.
59 GATS Art VII.1; AFS para 3.
60 GATS Art XXVIII(a).
61 GATS Art, I paras 1 and 3.
62 As discussed above, a measure under GATS Article VII, paras 1 and 3 and GATS Art XXVIII(a).
63 “3. A Member shall not accord recognition in a manner which would constitute a means of discrimination between countries in the application of its standards or criteria for the authorization, licensing or certification of services suppliers, or a disguised restriction on trade in services.”
64 GATS Preamble.
65 See the Vienna Convention on the Law of Treaties 1969 (VCLT), Art 31, noting sub-para 2. MH Hulme, “Preambles in Treaty Interpretation” (2016) 164 University of Pennsylvania Law Review 1281 at pp 1296–305: “… one relatively uncontroversial role for preambles … is to limit … the possible interpretations of a term in question”.
66 Pacta sunt servanda (Art 26 VCLT) may have no place in a unilateral domestic measure.