Dear Prudence: Allowances under International Trade and Investment Law for Prudential Regulation in the Financial Services Sector

Governments impose prudential regulations to ensure the stability of the financial sector and protect depositors and investors. However, these regulations may also restrict trade in financial services. The Annex on Financial Services of the World Trade Organization (WTO)'s General Agreement on Trade in Services (GATS) contains an exception allowing countries to take measures for 'prudential reasons' to protect the 'integrity and stability of the financial system' or to 'protect investors, depositors, policy holders or persons to whom a fiduciary duty is owed by financial service suppliers'. Corresponding provisions appear in numerous other trade and investment agreements. The WTO has now issued its first ruling on the prudential exception in Argentina Financial Services. The ruling of the Panel recognizes the policy space necessary for countries to determine their own prudential reasons for taking measures. As disputes regarding prudential exceptions are likely to increase in the coming years, two key challenges remain in applying such exceptions: adopting an integrated international approach to prudential regulation, given the diverse views held amongst countries; and identifying effective measures in preventing risks to the financial sector.