Blurred lines - Modes of supply in the GATS and financial services
This is one in a series of blogposts looking at how the modes of supply in the General Agreement on Trade in Services (GATS) apply to financial services. The modes of supply are the different ways that services can be provided under the GATS from one member to another.
Article I:2 of GATS states that services can be traded internationally in four different ways: so-called ‘modes of supply’: cross border trade in services, consumption abroad, commercial presence and presence of natural persons. Importantly, WTO members make separate commitments in service sectors according to these modes of supply.
The modes of supply
Article I:2 of GATS provides that, for the purposes of GATS, trade in services is defined as comprising the following four modes of supply:
1. from the territory of one member into the territory of any other member (cross border trade in services);
2. in the territory of one member to the service consumer of any other member (consumption abroad);
3. by a service supplier of one member, through commercial presence in the territory of any other member (commercial presence); and
4. by a service supplier of one member, through presence of natural persons of a member in the territory of any other member (presence of natural persons).
The boundary between Mode 1 and Mode 2 is unclear in relation to remote supply of services without the physical presence of the consumer (or the supplier) in a given member. This has been accentuated by modern communications technology which has made it even easier to provide services remotely. This is because where remote communication is being used it is not clear where the consumer is located for the purposes of determining which mode applies.
If it is possible for the consumer to be considered as being in a particular member even if the consumer is not physically located there, this raises the question of whether the same could apply for a supplier. So, for example, it is not clear whether a consumer using an app on his or her phone to use a service provided by a supplier physically located in that other member state could be considered for the purposes of Article I:2 to be located in the member of the supplier or vice-versa.
The Understanding on Commitments in Financial Services
GATS gives limited detail of the meanings of each mode of supply or the distinctions between them. The Understanding on Commitments in Financial Services (the Understanding), although not legally binding, provides a template for commitments by members according to different modes of supply (although the language used does not precisely track that in GATS). While the Understanding represents a form of practice it does not technically have legal force.
- Mode 1: Paragraph B.3 of the Understanding provides that members may permit non-resident suppliers of financial services to supply, as a principal, through an intermediary or as an intermediary, and under terms and conditions that accord national treatment: (i) a limited range of insurance, reinsurance, retrocession services; (ii) provide and transfer certain financial information and financial data processing and advisory and other auxiliary services relating to financial services.
- Mode 2: Paragraph B.4 provides that members may permit their residents to purchase in the territory of any other member the insurance, reinsurance and retrocession mention in Paragraph 3, as well as a wide range of banking and other financial services listed in the first Annex on Financial Services (the First Annex).
- Mode 3: Paragraph B.5 provides that members may “grant financial service suppliers of any other member the right to establish or expand within its territory, including through the acquisition of existing enterprises, a commercial presence”.
- Mode 4: Paragraph B.9(a) provides that members may permit temporary entry into their territory of certain personnel of a financial service supplier of any other member that is establishing or has established a commercial presence in the territory of the member. These include certain senior managerial personnel and specialists in the operation of the financial service supplier. Paragraph B.9(b) provides that members may permit, subject to the availability of qualified personnel in their territory, temporary entry into their territory of the specialists in computer services, telecommunication services, accounts of the financial service supplier, actuarial and legal specialists (who are associated with a commercial presence of a financial service supplier of any other member).
Mode 1 and Mode 2
This problem of whether services fall under Mode 1 or Mode 2 is especially pertinent to financial services and other information-based services, given the ability to provide them remotely. Some interpretations hold that where the supplier is physically located in one member and the consumer is physically located in another this will always fall into Mode 1. In US – Gambling, the Panel took the view that the services fell under Mode 1, seemingly because they were provided remotely, while indicating that other modes could be provided remotely. The Panel stated that remote provision of services includes “any situation where the supplier, whether domestic or foreign, and the consumer of gambling and betting services are not physically together”. It remains unclear whether a service provided remotely, with the supplier and consumer physically located in different members, can be considered to be provided in the member of the supplier and not the member of consumer, so that it falls under Mode 2.
Another area of uncertainty is where a consumer moves or travels to a different member after initially entering into the financial services transaction (or series of transactions in the case of a bank/payment/trading account, for example) in the first member. There is a question as to whether the mode of supply for a service can change when the location of the consumer changes.
After a consumer moves to another member, following the initial provision of the service, this means that the consumer is in a different physical location from the supplier, so it could be argued that this should fall under mode 1 even though the initial supply of the service before the consumer moved fell under mode 2 (as the consumer and supplier were physically in the same member at that point). This question could depend on the extent that the “service” is considered a single service, in which case it does not seem that it should be possible for the mode to change, or multiple services, in which case there is more of an argument that different modes could apply,
A key question in this scenario is whether a cross-border “service” comprises only the initial transaction, multiple transactions in a series or ongoing servicing of an initial transaction. For example, it could be argued that insurance is an ongoing cross-border “service” in the sense that insurance cover will be provided for a period of time after a policy is taken out, during which the contract will be administered by the insurer and key events may take place, such as paying out under the policy. On the other hand, the view could be taken that only the taking out of the insurance represents a cross-border “service”, although it could also be argued that both the initial taking out of the insurance and its ongoing provision amount to the services. Similarly, it could be argued that only the opening of a bank account constitutes a cross-border “service” but that ongoing deposits and withdrawals do not, although again this approach is open to challenge. This issue has not been addressed by the Panel and Appellate Body, although members and the WTO Secretariat have offered solutions. These are questions that have been considered in great depth from a financial regulation point of view but are less explored from a WTO law perspective.
This question is especially relevant in a Brexit context as consumers may have moved to the UK from the EU27 (or vice-versa) pre-Brexit and purchased financial services from UK suppliers while in the UK and then moved back to their original member of residence pre-Brexit and been provided with services through a cross-border branch passport (or vice-versa).
Mode 1 and Mode 3
A further problem is how transactions that were originally entered into through a branch are treated if the branch is closed but the supplier continues to supply the service from the member where it is headquartered. Where the service provided is ongoing it could fall under Mode 1 rather than Mode 3, as there would no longer be a commercial presence of the supplier in the member where the service was provided through a branch.
As with consumers who have moved from the one member to another and back, there would be a logic to taking the approach that the original mode of supply should apply to the ongoing supply of the service. Although this is not relevant to the legal interpretation of the GATS, from a pragmatic perspective it would be less disruptive than changing the mode of supply that applies. The issue of how services are treated where a branch closes but services continue to be provided by the supplier is especially relevant to Brexit, where on a hard Brexit branch passporting rights would be lost and it is expected that many financial firms may close their branches.
Another interesting aspect of the scope of Mode 3 is that both Panels in Mexico – Telecoms and China – Electronic Payment Services stated that Mode 3 can also include supply of services into a different member from that where the commercial presence is. That means that members who have made commitments under Mode 3 need to allow a commercial presence within their territory not only to supply the relevant services to consumers in that member but also to allow it to supply services from the commercial presence to consumers in other members. In effect, this means that the provision of services may fall under Mode 3 from the perspective of the commitments of the member where the commercial presence is, while falling under Mode 1 from the perspective of the commitments of the member into which the service is being provided.
GATS and the Understanding leave much about the modes of supply unclear. The next blogpost in this series will look in more detail at different interpretations of the modes of the supply that have been suggested to deal with this uncertainty.
Written by Omar Salem of Linklaters.
Edited by the Linklaters Trade Practice. The views and opinions expressed here are the personal opinions of the author(s) and do not necessarily represent the views and opinions of Linklaters.