Australia-United States Free Trade Agreement - Guide to the Agreement
13. Financial Services
1. Purpose and Structure
Chapter 13 provides cross-border suppliers of financial services with an
open and non-discriminatory environment for the supply of financial services. It
also provides financial institutions, and investors in financial institutions,
with an open and secure environment for investment. Thus it ensures
that financial service suppliers from each Party, and investors from each
Party in financial institutions, receive national treatment or most-favoured-nation
treatment (whichever is better) from the other Party.
However, recognising particular issues that affect the supply of financial
services, this Chapter contains additional disciplines as well as additional
safeguards that are specific to this sector.
Chapter 13 on Financial Services complements Chapter 10
on Cross-Border Trade in Services (CBTS) and Chapter
11 on Investment. Cross-border
trade in financial services is carved out of the scope of Chapter 10, and
is addressed only in Chapter 13. Investment in the financial services
sector is covered by Chapter 13 when it takes the form of investment in financial
institutions, and by Chapter 11 in all other cases. Financial institutions
are defined as any financial intermediary or other enterprise that is authorized
to do business and regulated or supervised as a financial institution under
the law of the Party in whose territory it is located.
2. What is covered by the Chapter?
The Financial Services Chapter is concerned with measures adopted or maintained
by a Party (at all levels of government) that affect:
- financial institutions located in the territory of that Party that are
controlled by persons of the other Party;
- investors of the other Party who have invested in financial institutions
located in that Party;
- the investments of investors of the other Party in financial institutions
located in that Party; and
- cross-border trade in financial services by service suppliers of the
The Chapter defines "financial services" as including all insurance
and insurance-related services, and all banking and other financial services,
as well as services incidental or auxiliary to a service of a financial nature.
The Chapter defines "cross-border trade in financial services" as
the supply of a financial service:
- from the territory of one Party into the territory of the other Party;
- in the territory of one Party by a person from that Party to a person
from the other Party; or
- by a natural person of a Party in the territory of the other Party.
The Chapter defines a "financial service supplier" as a national
or enterprise of one Party who is engaged in the business of supplying a
financial service in that Party's territory. Under the FTA, a "national" includes
permanent residents as well as citizens.
The Chapter defines "financial institution" as a financial intermediary
or other enterprise that is authorised to do business and regulated or supervised
as a financial institution under the law of the Party in which it is located.
The Chapter does not apply to actions by a Party relating to:
- activities or services forming part of a public retirement plan or statutory
system of social security; or
- activities or services conducted for the account or with the guarantee
or using the financial resources of that Party, or its public entities,
except where such activities or services have been opened up to competition.
3. Core obligations
The Chapter requires each Party to accord to investors of the other Party,
financial institutions of the other Party, and investments of investors of
the other Party in financial institutions, national treatment (Article 13.2)
and most-favoured-nation treatment (Article 13.3).
National treatment means treatment no less favourable than a Party accords,
in like circumstances, to its own investors, financial institutions, and
investments of its own investors in financial institutions.
Most-favoured-nation (MFN) treatment means treatment no less favourable
than a Party accords, in like circumstances, to the investors, financial
institutions, and investments of investors in financial institutions, of
a non-Party. The national treatment and MFN obligations apply to the
establishment, acquisition, expansion, management, conduct, operation, and
sale or other disposition of financial institutions and investments in financial
institutions in its territory.
The Chapter also requires that each Party accord MFN treatment (Article
13.3) to cross-border financial service suppliers of the other Party, and,
for services specified in Annex 13-A, national treatment (Article 13.5). MFN
treatment means treatment no less favourable than a Party accords, in like
circumstances, to cross-border financial service suppliers of a non-Party. National
treatment means treatment no less favourable than a Party accords, in like
circumstances, to its own financial service suppliers.
3.2 Cross-Border Trade
Article 13.5.2 requires each Party to permit persons in its territory (and
its nationals wherever they might be) to buy financial services from cross-border
financial service suppliers of the other Party located in the territory of
the other Party. However, this does not require a Party to allow such
suppliers to do business or solicit in its territory.
3.3 Market Access for Financial Institutions
Article13.4 prohibits each Party from placing limits, either on the basis
of a regional subdivision or on the basis of its entire territory, on:
- the number of financial institutions;
- the value of financial service transactions or assets;
- the number of financial service operations or the quantity of financial
services output; or
- the number of natural persons that may be employed in a particular financial
service sector or that a financial service supplier may employ.
It also prohibits each Party from placing controls on the type of legal
entity or joint venture through which a financial institution can supply
3.4 Senior Management and Boards of Directors
A Party cannot require that a financial institution located in the territory
of that Party that is controlled by persons of the other Party appoint individuals
of any particular nationality as senior managers or other essential personnel
A Party cannot require that more than a minority of the board of directors
of a financial institution located in the territory of that Party that is
controlled by persons of the other Party be nationals of that Party, persons
residing in the territory of that Party, or a combination of those (Article
4. Non-conforming measures
Article 13.9 allows the Parties to maintain or adopt certain measures that
are not consistent with the provisions of the obligations on National Treatment,
MFN Treatment, Market Access for Financial Institutions, Cross-Border Trade
and Senior Management and Boards of Directors (i.e. "non-conforming
measures"). These non-conforming measures must be identified
in individual Schedules for each Party that are contained in two Annexes
to the Agreement:
- Annex III can be used by a Party to reserve the right to maintain existing
non-conforming measures that are specifically identified in its Schedule
to that Annex. These measures cannot be made more restrictive (i.e.
less consistent with the obligations of the Chapter). Furthermore,
Annex III measures are subject to a "ratchet" mechanism, which
means that if a Party liberalizes such a measure, i.e. makes it less inconsistent
with an obligation, then it cannot subsequently make it more restrictive. In
other words, the ratchet mechanism means that the liberalized measure becomes "bound" as
part of the Agreement's treaty commitments. However, the ratchet
mechanism does not apply to any non-conforming measures related to Article
13.5 (Cross-Border Trade).
- Annex IV can be used by a Party to reserve the right to maintain existing
non-conforming measures, make these measures more restrictive, and adopt
new non-conforming measures for sectors, sub-sectors or activities identified
in its Schedule to that Annex.
These non-conforming measures are set out in Annexes to Chapter 13. In
addition, some non-conforming measures set out in the Annexes to Chapters
10 and 11 are treated as non-conforming measures for the purposes of Chapter
13, as the measures involved are covered by the latter Chapter as well as
the former (Article 13.9.4)
The Schedules to Annex III and IV represented a carefully negotiated balance
of commitments between the Parties.
5. Other obligations
New Financial Services
If a financial service is supplied in the territory of one Party but not
the other, and the other Party would permit its own financial institutions
to supply that service without additional legislative action, then it must
allow financial institutions of the other Party to provide that service in
its territory (Article 13.6). However, that Party can require a certain
institutional and juridical form through which the new financial service
may be supplied. It can also require that authorisation be obtained
for the new financial service, but it must make a decision on an application
for such authorisation within a reasonable period of time and the authorisation
can only be refused for prudential reasons (Article 13.6).
5.1 Specific Commitments
Annex 13-B sets out certain specific commitments by the Parties. These
provide that each Party will allow the other Party's financial institutions
to provide investment advice and portfolio management services to their collective
investment schemes. They also provide assurances aimed at promoting
expeditious approval of insurance products. In Australia's case, where
insurance is regulated by authorising and supervising insurers, and not by
approving insurance products, the commitment would only be relevant if our
system of insurance regulation was modified in the future to include product
5.2 Regulatory Transparency
Article 13.11.2 requires that each Party fairly administer its regulations
of general application that come within the Chapter.
Article 13.11.3 requires that each Party must, to the extent practicable,
publish in advance any proposed regulations of general application that come
within the Chapter, as well as an explanation of the purpose of that regulation. Each
Party must also, to the extent practicable, let interested persons (and the
other Party) make comments on the proposed regulations.
Each time a Party adopts a final regulation in relation to a matter covered
by the Chapter, Article 13.11.4 requires that it should, to the extent practicable,
give a written response to any comments it received on the proposed regulation.
Article 13.11.5 provides that each Party must, to the extent practicable,
provide notice of the requirements of final regulations a reasonable time
before they come into effect.
Each Party must make sure that rules of general application that are made
by non-government bodies that have authority over financial service suppliers
or financial institutions can be made available to those who wish to look
at them (Article 13.11.6).
Article 13.11.7 requires that each Party be in a position to respond to
inquiries from interested persons about the regulations it imposes in the
areas covered by the Chapter.
If a Party has requirements that a person complete an application to provide
a financial service, it must make sure that the requirements, including any
documentation required, for completing such an application, are easily available
(Article 13.11.8). If the person asks, the Party must give a prompt
update as to how the application is progressing. If the Party requires
further information from the applicant, it must let the applicant know without
undue delay (Article 13.11.9)
If an investor in a financial institution, a financial institution, or a
cross-border financial service supplier of the other Party properly completes
an application process relating to the supply of a financial service, then
the Party assessing the application must let that person know of the decision
on the application within 120 days and must promptly notify the applicant
of its decision. If the Party cannot meet the 120 day deadline, it
must inform the applicant and then make its decision within a reasonable
time. If the application was unsuccessful, the Party must, to the
extent practicable, tell the applicant why (Article 13.11.10)
The prudential measures taken by countries differ around the world. Some
countries have certain rules about recognising the prudential measures of
foreign countries. Sometimes this recognition is pursuant to formal
agreements with the foreign country concerned or a Party might accord such
recognition unilaterally. Article 13.15.1 makes it clear that the
Chapter does not prevent a Party from according such recognition to persons
from foreign countries - but if it accords such recognition to persons from
a third country, then it must give the other Party the chance to show that
it should also be accorded such recognition (Article 13.15.2 and 13.15.3). An
exchange of side-letters to the Chapter records the shared understanding
of the Parties that the scope of the measures covered by Article 13.15 is
no less extensive than the scope of the measures covered by similar provisions
on recognition in Article VII of the GATS, and paragraph 3 of the GATS Annex
on Financial Services.
5.4 Financial Services Committee
The Chapter sets up a Financial Services Committee which, amongst other
things, is charged with considering ways to further integrate the countries'
financial services sectors (Article 13.16 and Annex 13-C). An exchange
of side-letters to the Chapter records the agreement of the Parties that
the Committee provides an appropriate forum to discuss certain cross-border
issues pertaining to securities, and that the Committee should report on
its work on these issues within two years of the entry into force of the
Agreement. The side-letter also records Australia's proposal that
these issues that the Committee should discuss include cross-border access
for foreign securities markets and foreign collective investment schemes.
5.5 Payment and Clearing Systems
Article 13.13 requires each Party to accord to financial institutions located
in its territory that are controlled by persons of the other Party treatment
no less favourable than that it accords to its own financial institutions,
in like circumstances, in respect of access to payment and clearing systems
operated by public entities, and to official funding and refinancing facilities
available in the normal course of ordinary business. This does not
provide such a financial institution with access to that Party's lender of
last resort facilities.
6. Other Provisions
Certain provisions of Chapters 10 (Cross-Border Trade in Services) and 11
(Investment) are incorporated into Chapter 13 (Article 13.1.2). These
are Articles 11.7 (Expropriation and Compensation), 11.12 (Denial of Benefits),
11.8 (Transfers), 11.14 (Special Formalities and Information Requirements),
11.11 (Investment and the Environment), and Article 10.11(Denial of Benefits). In
addition, Article 10.10 (Transfers and Payments) is incorporated into Chapter
13 to the extent that cross-border trade in financial services to subject
to obligations under Article 13.5.
Article 13.7 provides that nothing in the Chapter requires that a Party
furnish or allow access to:
- information related to the financial affairs and accounts of individual
customers of financial institutions or cross-border financial service
- confidential information, the disclosure of which would impede law enforcement
or otherwise be contrary to the public interest or prejudice the legitimate
commercial interests of particular businesses.
Article 13.10 provides that the Chapter does not prevent a Party from taking
actions for prudential reasons (e.g. to protect people who deposit money
in banks or who take out insurance policies). However, if such an
action does not conform to the provisions of the FTA, it must not be used
as a means of avoiding a Party's commitments or obligations under such provisions
The Chapter does not prevent a Party's public entities from taking non-discriminatory
actions of general application in pursuit of monetary and related credit
policies or exchange rate policies, provided that they are not inconsistent
with its obligations under the obligations with respect to transfers and
payments (Article 13.10.2).
The Chapter does not prevent a Party from taking actions needed to secure
compliance with laws or regulations that are not inconsistent with the Chapter
(e.g. those dealing with deceptive conduct or default on financial services
contracts) - but it must not do so in a way that would amount to:
- a means of arbitrary or unjustifiable discrimination between countries
where like conditions prevail; or
- a disguised restriction on investment in financial institutions or cross-border
trade in financial services. (Article 13.10.4).
March 6, 2004