Chapter 17 of the draft United States-Mexico-Canada Agreement ("USMCA") has updated the terms of Chapter 14 (Financial Services) of NAFTA. While many of the revisions appear to address technical wording changes, there are some notable changes that have not received much media attention. This commentary will identify some of those. Please note that Chapter 17 has been updated with several definitions and annexed provisions. To fully understand the terms of the Chapter, reference must be made to those, but, for the sake of brevity, those definitions are not repeated in this article. This article provides a general overview and reference to the details of the Chapter is necessary to fully understand the scope of the provisions and the multiple exceptions to the provisions that are included.
Chapters of USMCA and NAFTA generally explain their scope and applicability. The new Chapter 17 now specifies that activities forming part of public retirement plans, social security or with the guarantee of a country (a "Party") or its public entities, which were previously excluded from application, are now included to the extent that the services are conducted by financial institutions in competition with a public entity or financial institution. The Chapter now specifically excludes applicability to government procurement of financial services or subsidies, grants or other (indirect) financial assistance to a cross- border supply of financial services by a cross-border supplier of another Party.
2) National Treatment
The National Treatment section, which provides that Parties accord "no less favourable" treatment to entities of another Party than to its own entities has been expanded to cover certain annexed cross-border financial service suppliers (which in the case of the USA and Canada are quite similar and include insurers and providers of ancillary financial services). This does not mean that those entities must be permitted to do business or solicit services in another Party's territory.
3) Market Access
The annexed services noted above must also not be subject to market restrictions (including within regional subdivisions, i.e. states and provinces) including restrictions based on numbers of participants, quotas, monopolies, total value of services required, output of financial services, numbers of employees or types of legal entities. Again, this does not mean that those entities must be permitted to do business or solicit services in another Party's territory. Residency or a physical presence is not required for the delivery of the services, although registration and authorization may be.
4) Customer Information
The Chapter does not require disclosure of financial affairs or accounts of individual customers of financial institutions or cross-border financial services suppliers.
5) Transparency and Administration
The Chapter speaks generally to ensuring that reasonable standards will be applied in terms of government measures relating to financial services, such as advance notice of regulations, opportunities for comment on proposed regulations, addressing comments on regulations, permitting applications to provide services and allowing for a reasonable time to complete those, allowing documents authenticated domestically rather than originals to be submitted to a Party, reasonable notice to and time to correct incomplete applications or resubmit refused applications, explanations as to fees (and not to use fees to avoid commitments under the Chapter).
6) Payment and Clearing Systems
Parties shall allow access by financial institutions of a second Party that are established in the first Party's territory to have access to payment and clearing systems operated by public entities and to official funding and refinancing facilties (but not lender of last resort facilities) available in the ordinary course of business.
7) Transfer of Information
Information, including personal information, may be transferred in and out of a Party's territory, electronically, for the conduct of business, subject to a right of a Party to protect personal data, privacy and confidentiality.
8) Location of Computing Facilities
Physical location of computing facilities within a Party's territory may not be a condition for the licensing or permitting of a financial institution or financial services supplier within that territory. Notably, Canada is exempted from application of this provision for one year.
The updates to Chapter 17 do not appear to be revolutionary and therefore it is not surprising that they have not attracted a lot of media attention compared to Chapters that affect other industries. However, provisions relating to transfer of information and location of computing facilities do have significance as they will alter existing Canadian OSFI requirements and they permit financial institutions to look to low cost delivery centres for those needs. The approach is consistent with the philosophy behind certain provisions of the new USMCA Chapter on digital trade. The reference to "individual" customers is slightly odd drafting in the Customer Information provision as it could be read to require that information of all or a group of customers could be required as long as one-off individual customer information disclosure is not required.
Other provisions noted above appear to be less of a holistic rewriting of NAFTA's Chapter 14 but rather adjustments or more precise applications of most-favoured-nation provisions. Application of provisions to public pension plans and social security schemes broadens the scope though the impact is not immediately obvious in Canada. Market Access conditions noted above are also welcome in terms of unfettered free trade but may not have applicability in Canada. Transparency and Administration provisions are likely to be easily complied with by Canadian federal regulators and will be beneficial in requiring that provincial regulators comply with a reasonable performance standard.
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