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“Pre-Established” Regulations and Financial Services

By Max Levin
May 19, 2010
Harrison Institute for Public Law

To read the publication click here (PDF, 17 pages, 760 KB)


The World Trade Organization is negotiating “disciplines” on domestic regulation, which is essential for both development and environmental protection. Often ambiguous, some of the draft disciplines can be interpreted as a radical departure from the practice of most nations. They could change the course of regulation and development, particularly within federal systems and in small and vulnerable economies, where government systems are changing.

Three generally applicable disciplines are contained in one sentence that requires regulations to be “pre-established, based on objective and transparent criteria and relevant to the supply of the services to which they apply.” If these terms are interpreted according to their ordinary meaning, conflicts with domestic regulations are foreseeable.

There is little history for this term in WTO law, and without clarification, it is ambiguous. It could mean, establish regulations before government applies them (not retroactive, the predominant practice); or it could mean, establish regulations before service suppliers rely on pre-existing law then they invest. The latter meaning invites future conflict in a number of situations when governments seek to change regulations. For example, governments are changing the following types of financial regulations in response to volatile markets and development conditions:

  • High Capital Requirements - In the wake of their financial crises, nations ranging from the United States to Germany to Chile have proposed raising their capital requirements. Under a broad interpretation of the “pre-established” provision, these sorts of changes to capital requirements could be challenged in the WTO.
  • Directed Lending - Future “directed lending” policies could be jeopardized by a broad interpretation of the “pre-established” provision. Unlike capital requirements, “directed lending” is not a prudential measure
  • Standards for Foreign Investment - Standards provide differential treatment of some institutions based on upon whether they engage in cross border trade in financial services. Standards for foreign investment are prudential measures.
  • Competition and Antitrust Policy - Antitrust regulations often discourage mergers and acquisitions in order to prevent large banks from becoming so big that they establish sufficient market power to reduce competition from smaller banks.
  • Regulation of Risky Trading Practices - High-risk trading practices have emerged as a primary cause of the recent crisis. In particular, practices such as derivatives trading, in which highly specialized traders move vast sums of money around in transactions.

Investors have already challenged changes in regulations under bilateral investment treaties

(BITs). This paper examines BIT cases as a likely source of guidance for resolving the ambiguity of a “pre-established” discipline. If WTO panels follow the same logic as BIT arbitrators, the result could be a significant departure from the practice of many nations. Moreover, investors might be able to incorporate a “pre-established” discipline to strengthen their BIT claims. We conclude with questions for WPDR negotiators, which give them clear alternative meanings, which they can accept or reject in order to avoid a discipline that is unpredictable and invites conflict.

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