[CTC] U.S. Financial Firms Worried About TPP Exception For Malaysia, Data Flow Rules

[Arthur Stamoulis]

U.S. Financial Firms Worried About TPP Exception For Malaysia, Data Flow Rules
Posted: November 03, 2015
Inside US Trade

U.S. financial services firms are raising red flags about two aspects of the Trans-Pacific Partnership (TPP) agreement reached on Oct. 5 that they find objectionable: an exception that allows Malaysia to maintain broad discretion to block foreign investment in the financial sector, and rules on data flows in the financial services chapter that are less stringent than those that apply to all other sectors, according to informed sources.

These sources said Malaysia has secured an exception in TPP that would allow it to keep in place an existing screening mechanism under which any new foreign investments in the financial sector, including banks and insurance companies, will only be approved if the government determines they are in the “best interests of Malaysia.”

This exception would likely take the form of a “non-conforming measure” to the TPP's market-opening commitments on financial services.

U.S. financial services firms are urging the Obama administration to negotiate some sort of adjustment or clarification that would further narrow the scope of this screening mechanism or set limits on it, according to these sources. Such an adjustment could take the form of a side letter, they said.

For example, Malaysia could agree in a side letter to exempt investments below a certain monetary threshold from the “best interests” test, or identify specific criteria it will examine in determining whether an investment is in the best interests of Malaysia. Other options include publishing such criteria at a later date, or eliminate the screening mechanism after a certain number of years, according to these sources.

U.S. financial services companies oppose the exception in TPP because they view it as too broad and believe it sets a bad precedent for other Asian countries to follow, sources said.

Meanwhile, the data flow provision in the TPP financial services chapter is expected to consist of an obligation for governments to allow a financial services company to transfer data freely across borders, but stop short of banning countries from requiring data to be stored on local services.

This stands in contrast to the disciplines on data flows in the electronic commerce chapter, which are expected to require countries to generally refrain from blocking data flows and imposing server localization requirements.

Despite their worries about these two aspects of the deal, U.S. financial services companies recognize that TPP more broadly has the potential to benefit their sector, according to one informed source. “Though we expect that TPP will create a lot of access for financial institutions, these are two areas that financial service providers are concerned might not be as strong as they could be,” this source said.

When it comes to the data flow issue, U.S. financial services firms and the congressional trade committees have long been worried that financial services would be treated differently.

The Senate Finance Committee and House Ways & Means Republicans included identical language in their reports on the 2015 fast-track law calling for U.S. negotiators to seek equal treatment for financial services sector in the area of digital trade.

The law states that the principal negotiating objectives of the U.S. in the areas of digital trade and cross-border data flows include ensuring “that governments refrain from implementing trade-related measures that impede digital trade in goods and services, restrict cross-border data flows, or require local storage or processing of data.”

Both committee reports note that restrictions on cross-border data flows or requirements to store and process data locally are detrimental to all sectors of the economy. They also contain an identical sentence saying that the committees expect “U.S. negotiators to pursue provisions that afford equal protection to all sectors, including financial services.”

A joint summary of the TPP deal by the 12 countries states that, in the e-commerce chapter, the TPP parties “commit to ensuring free flow of the global information and data that drive the Internet and the digital economy, subject to legitimate public policy objectives such as personal information protection. The 12 Parties also agree not to require that TPP companies build data centers to store data as a condition for operating in a TPP market.”

But the joint summary's description of the financial services chapter does not mention server localization. Instead, it says the TPP includes “specific commitments on portfolio management, electronic payment card services, and transfer of information for data processing.”

One informed source said the language on data transfers in the TPP financial services chapter is expected to be similar to that included in the U.S.-Korea free trade agreement. The KORUS language states that each party “shall allow a financial institution of the other Party to transfer information in electronic or other form, into and out of its territory, for data processing where such processing is required in the institution’s ordinary course of business.”

This source said the U.S. government had not sought an obligation prohibiting the localization of servers in the financial sector because it wanted to maintain “policy space” for U.S. regulators to implement such restrictions in the future.

By contrast, the U.S. fought hard for Malaysia to roll back its screening mechanism for financial services investments, but ultimately came up short, sources said.

The Office of the U.S. Trade Representative singled out the screening mechanism -- part of Malaysia's Financial Services Act of 2013 -- as a non-transparent trade barrier in its 2015 National Trade Estimate Report. At the same time, the report notes that the law already provides four basic criteria that the Malaysian central bank uses in determining whether an investment is in the best interests of Malaysia.

“Under Malaysia’s Financial Services Act, the issuance of new licenses is guided by prudential criteria and
a nontransparent 'best interests of Malaysia' test,” USTR said in the report. “In determining the best interests of Malaysia, the central bank of Malaysia, Bank Negara, considers the contribution of the investment to promoting new high value added economic activities, addressing demand for financial services where there are gaps, enhancing trade and investment linkages, and providing high-skilled employment opportunities.”

Sources said the “best interests” test imposed under the Financial Services Act of 2013 represented a step back from Malaysia's prior rules on foreign investments in the financial sector.

Those rules set foreign equity caps of 70 percent for domestic investment banks, insurance companies, Islamic banks, and Islamic insurance operators. They also allowed foreign equity above 70 percent for insurance companies on a case-by-case basis if the investment is determined to facilitate the consolidation and rationalization of the insurance industry, according to the 2015 NTE report.

Sources said there are several reasons why foreign financial services firms would want to be able to have a majority share in Malaysian companies. Among these are that a majority stake allows the foreign company to control the operation of the Malaysian firm and gives it a bigger share of any profits earned.
 
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