Coordinating Modern Cross-Border Financial Services: No Global Policy, No Global Legal Framework, but Some Regional Opportunities

• Author: Antoine P. Martin
• Position: Antoine P. Martin (Ph.D, LL.M) is a Research Associate at the Chinese University of Hong Kong, Faculty of Law, and a Fellow of the Faculty's Centre for Financial Regulation and Economic Development (CFRED), focusing on Investment and Trade law & policy with a particular interest for financial services & financial regulation. The author is...
• Pages: 467-502

Coordinating Modern Cross-Border Financial

Services: No Global Policy, No Global Legal

Framework, but Some Regional

Opportunities

A

NTOINE

P. M

ARTIN

*

I. Introduction

The global economic crisis, which has hit the international community

since 2008, has once again pointed at the limits of financial liberalization,

often perceived and described as a model excessively fostering financial

services and organizing financial instability by unbundling financial flows.

1

Meanwhile, the continuous improvement of computing technologies and the

increased interconnectedness of regional and global financial markets have

given a significant boost to a financial services industry increasingly

operating as an autonomous economic sector on a worldwide and borderless

basis.

In reality, financial services providers have become key economic actors

on a worldwide scale. Whereas financial services and financiers merely used

to play a trade support role when trade was about goods rather than services,

they have vastly increased their influence and reach over time in dealing

with, nowadays, traditional activities such as banking, financing, insurance,

* Antoine P. Martin (Ph.D, LL.M) is a Research Associate at the Chinese University of

Hong Kong, Faculty of Law, and a Fellow of the Faculty’s Centre for Financial Regulation and

Economic Development (CFRED), focusing on Investment and Trade law & policy with a

particular interest for financial services & financial regulation. The author is grateful to

Professor Bryan Mercurio and Professor Anatole Boute (CUHK) for their support and

constructive comments. All mistakes remain his own.

1. Financial services are commonly defined as the financial, investment, and transactional

functions performed by commercial, financial, banking, and insurance institutions to allow

effective access and use by individuals and firms of modern, affordable, convenient, qualitative,

and sustainable financial means, including banking and insurance-related services. See Access to

Financial Services as a Driver for the Post-2015 Development Agenda,

UNCTAD P

OL

’

Y

B

RIEF N

°

35

(Sept. 2015), https://goo.gl/7CptBO. See also TPP Financial Stability Threats Unveiled: It’s

Worse than We Thought,

P

UB

. C

ITIZEN

(Nov. 2015), https://goo.gl/blcJQI (on international

banks and state sovereignty). Please note that the regulation of capital account liberalization—

i.e. the facilitation of financial flows across borders—is voluntarily excluded from the scope of

this research paper as the author has analyzed it elsewhere, in relation to the changing role of

the International Monetary Fund towards global financial stability and capital controls. See

Antoine P. Martin & Bryan Mercurio, The IMF Mandate on Capital Controls: Legal Analysis of the

Article IV Broad and the Institutional View of 2012,

A

RIZ

. J. I

NT

’

L

& C

OMP

. L.

(forthcoming

2017).

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468 THE INTERNATIONAL LAWYER [VOL. 50, NO. 3

securities, and pensions. In recent times, they have also given the masses

simple yet powerful tools to manage their transactions, investments, and

diverse financial operations through innovative channels without the

constraints once imposed by the traditional banking system and at a lesser

cost.

This evolution in the financial industry is, however, raising various

concerns at the global level because, as a result of their influential,

algorithmic, electronic, reactive, and borderless nature, new generations of

financial services tend to gain influence towards markets and/or disrupt the

established order without necessarily being bound by the financial sector

regulations.

2

Hence, to what extent is the international community capable

of encouraging and coordinating the development of future, inevitable, and

borderless financial services?

The main, current debates on financial regulation are rather pessimistic.

Historically, financial services were hardly considered a regulatory concern.

The Bretton Woods negotiations which led to the creation of the

International Monetary Fund (IMF), the International Bank for

Reconstruction and Development (IBRD), and the current World Bank,

essentially insisted on reconstruction and recovery after WWII but placed

no emphasis on the liberalization of trade exchange or on financial

facilitation.

3

In time, nonetheless, the immense liberalization of

international trade, which occurred primarily as a result of the GATT/

WTO, has eventually led to a tremendous rise in the level of goods traded.

This, in turn, has increased the need for cross-border transactions as well as

the need to rely on more efficient financial services on a cross-border basis.

Later on, the increasing opening of financial markets and the large increase

in the commodities trade eventually transformed international finance into a

self-standing activity and industry acting both autonomously and

distinctively from palpable trade.

4

Today, the large autonomy and influence enjoyed by financial services

providers is generating important debates. For instance, OECD research

highlights that the notion of “financial integration,” i.e. the convergence of

financial activities within important financial conglomerates, forces

regulators to adapt to new forms of financing mechanisms and services.

5

Similarly, the FSB, which is responsible for coordinating national financial

authorities and international standard-setting bodies whilst monitoring and

making recommendations about the global financial system, has raised

concerns about the so-called “Shadow-Banking” or “market-based

2. Res. Rep. on Fin. Tech. (Fintech),

IOSCO

74 (Feb. 2017), https://goo.gl/yqqUq1.

3. Reza Moghadam & Sean Hagan, The Fund’s Role Regarding Cross-Border Capital Flows,

I

NT

’

L

M

ONETARY

F

UND

3 (Nov. 15, 2010), https://www.imf.org/external/np/pp/eng/2010/

111510.pdf.

4. See Martin & Mercurio, supra note 1, § 2.3

5. See Harold D. Skipper, Jr., Fin. Services Integration Worldwide: Promises and Pitfalls,

OECD

13 (2001), https://goo.gl/fa0p7O.

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2017] COORDINATING MODERN CROSS-BORDER FINANCIAL SERVICES 469

financing” industry,

6

and warned about the systemic risks created by credit

intermediation practices involving entities, named as “other financial

intermediaries” (OFIs), outside of the regular regulated banking system.

7

Very recently in January 2017, the FSB formulated additional concerns as to

the potentially negative impacts of technology-based financial services, the

so-called “FinTech” services, which have increasingly gained influence as a

result of modern technological performances and developments

8

, and

recommended that the subject matter be integrated into the G20 Agenda for

further surveillance.

9

In pointing at such concerns, these international institutions clearly

indicate that the international community is lagging behind technology and

financial services providers, both in terms of knowledge, policymaking, and

regulation.

10

This discourse characterized by a financial, instability-focused

mind-set, however, reveals another important trend. To the OECD,

financial services policymaking primarily is about ensuring the safety of the

financial system.

11

To the FSB, financial services policymaking over the past

years has achieved great success, particularly in terms of reforming the

global financial system to mitigate vulnerabilities, to consolidate financial

infrastructures, to reinforce bank solvability through higher capitalization,

and to reduce the effects of interbank exposure.

12

At the European Union

(EU) level, financial policymaking has consisted of setting up a framework

6. For a definition of shadow banking, see Laura E. Kodres, What Is Shadow Banking?,

I

NT

’

L

M

ONETARY

F

UND

42-43 (June 2013), http://www.imf.org/external/pubs/ft/fandd/2013/06/

basics.htm (“Many financial institutions that act like banks are not supervised like banks. If it

looks like a duck, quacks like a duck, and acts like a duck, then it is a duck—or so the saying

goes. But what about an institution that looks like a bank and acts like a bank? Often it is not a

bank—it is a shadow bank.”).

7. See Global Shadow Banking Monitoring Report 2015,

F

IN

. S

TABILITY

B

OARD

(Nov. 12, 2015),

http://www.fsb.org/wp-content/uploads/global-shadow-banking-monitoring-report-2015.pdf.

8. Douglas Arner et al., The Evolution of Fintech: A New Post-Crisis Paradigm?, UNSW Law

(Oct. 1 2015), https://goo.gl/DM3sY9.

9. Adding Fintechs to the 2017 G20 Agenda, the FSB particularly considered how FinTech

developments are affecting the global financial system in January 2017. See Mark Carney, The

Promise of FinTech – Something New Under the Sun?,

B

ANK OF

E

NGLAND

(Jan. 25, 2017), https://

goo.gl/dXG5K0. For comments, see also Caroline Binham & Claire Jones, Fintechs Warned to

Expect Tougher Regulation,

F

IN

. T

IMES

(Jan. 25, 2017), https://www.ft.com/content/6e2bd98c-

e32a-11e6-8405-9e5580d6e5fb?mhq5j=E1.

10. Res. Rep. on Fin. Tech. (Fintech), supra note 2, at 75 (“It is clear . . . that, taken together, the

changes already underway as a result of Fintech are substantial, in certain cases leading to

disintermediation and reintermediation, and in other cases testing the boundaries of full

disintermediation through the use of technology.”).

11. Stephen Lumpkin, Supervision of Fin. Services in the OECD Area,

OECD

(2002), https://

goo.gl/CnDSeM (“A central goal in the design of regulatory and supervisory regimes for

financial services is to create a framework that ensures the safety of the financial system as a

whole and allows other objectives of supervision (e.g. investor and consumer protection) to be

attained efficiently and effectively.”).

12. Letter from Mark Carney, FSB Chair, to G20 Leaders, Building a Resilient and Open

Global Fin. System to Support Sustainable Cross-Border Investment (Aug. 30, 2016) (on file

with Fin. Stability Board).

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