Financial Regulation challenged by European Trade Policy

02 October 2018


On 2 October 2018, the Veblen Institute and Finance Watch published a report on the impact of European trade policy on financial regulation.

Trade agreements currently being negotiated or already approved introduce numerous restrictions over the right of states to regulate, especially in the field of financial regulation, and limits their capacity to react to ensure financial stability. The report draws this conclusion after analysing bilateral agreements already negotiated such as CETA and JEFTA, those still under negotiations or suspended (TTIP), as well as the plurilateral Trade in Services Agreement (TiSA).

The very idea of including financial services in these trade agreements, with the specific objective to increase production and exchange volumes in this sector, goes against lessons learned from the last global financial crisis. This inclusion could lead to increased financial risk-taking and facilitate the propagation of future crises, while it at the same time reducing the political space for States to respond to a crisis. In addition, investors will be able to contest financial regulations through the mechanism for regulatory arbitrage between States and investors, and this could stop measures deemed as necessary to maintain financial stability in the future.

Specifically, the report issues warnings against the following provisions contained in these agreements:

  • These new trade deals are “living” agreements: once adopted, they can be enlarged through the mechanism of regulatory cooperation, i.e. technical-level dialogues designed to promote the convergence of both parties’ regulation. This offers new lobbying opportunities to representatives of the financial sector. The real impact of these agreements therefore risks moving beyond what was initially intended.
  • The negotiation method used is that of a “negative list”: all financial services that are not expressly listed as being excluded from the agreement are by default open to competition. This makes it more difficult to pass future financial services regulation.
  • These agreements contain investment protection provisions that could be used to stop States from properly acting if faced with a financial crisis, and in particular from taking preventative measures. States would, for example, be constrained from taking specific measures to limit the size of banks or to ring-fence activities judged to be detrimental, such as high-frequency trading.
  • The new agreements also look to limit measures in respect of localisation and storage of financial data for security or access reasons and for monitoring by competent authorities.

The Veblen Institute and Finance Watch propose the following recommendations:

  1. Ensure transparency and proper democratic control over trade agreements.
  2. Exclude financial regulation from trade negotiations.
  3. Rule out the use of the investor-state dispute settlement mechanism.
  4. Stop using the “negative list” method to grant market access for services.
  5. Ensure that public services and social security systems are explicitly protected.
  6. Protect the ability of States to regulate efficiently, in particular to get rid of norms contained in investment chapters whenever they turn out to be incompatible with policy recommendations made by financial regulators or academic research.
  7. Include a clause in trade agreements to allow States to put in place effective checks on movements of capital when deemed necessary.
  8. Make trade and services agreements reversible.

“Free trade agreements have historically served as a conduit for the liberalisation and deregulation that led to the 2007-2008 financial crisis”. Benoît Lallemand, Secretary General of Finance Watch