Backroom deals could cripple bank regulation

By Dr Patricia Ranald , AFTINET Convener

June 24, 2014: Secretive trade talks reveal a worrying push towards financial deregulation on a global scale. The Australian government should oppose this hidden agenda and ensure consumers are well protected, writes Patricia Ranald for The Drum.

WikiLeaks has revealed yet another set of secret trade talks, this time between Australia, the US, Japan, the EU and 19 other governments, on proposals to radically deregulate financial services.

At a time when many governments are still attempting to re-regulate the financial sector after the disaster of the Global Financial Crisis (GFC), proposals in this document would prevent governments from protecting consumers and responding to future financial crises.

What is the document and why is it secret?

The leaked document is the draft financial services chapter of secret global negotiations for a broader, legally binding Trade in Services Agreement (TISA), which began in Geneva in 2012. These talks are a "coalition of the willing" of selected governments outside the World Trade Organisation (WTO) framework. This means they do not have to apply WTO practice about publication of draft documents.

The WTO responded to community demands for publication of draft documents more than a decade ago, so these talks are big a step backwards in global trade transparency standards.

The WTO negotiations on the General Agreement on Trade in Services, which involve all 159 WTO members, mostly poorer developing countries, have bogged down precisely because most developing countries would not accept radical deregulation of financial and other services. Global services corporations have lobbied for the TISA as an alternative.

The TISA negotiations allow a minority of mostly richer countries to negotiate behind closed doors. The plan is to reach agreement and then present the TISA on a take-it-or-leave-it basis to the majority of WTO members. It is one of a set of agreements with similar agendas being negotiated behind closed doors, which includes the Trans-Pacific Partnership regional agreement (TPP) involving Australia, the US and 10 other Pacific Rim countries.

What impacts would the TISA proposals have in Australia?

The leaked chapter aims to open up national economies to greater foreign investment in banking and financial services, with no limitations on levels of foreign investment or numbers of investors, and minimal levels of national regulation.

This contradicts the global trend in regulation of financial services. Deregulation of financial systems, especially in the US was a major cause of the GFC. This permitted banks and other financial institutions to operate without adequate consumer protections, to invent and invest in ever riskier financial products and to engage more easily in national and international mergers.

These changes spread toxic "sub-prime" mortgage investment securities from the US throughout the world and created banks that were "too big to fail".

Most governments have since taken some steps to re-regulate nationally and internationally. However, these attempts have been fiercely resisted by global banks.

Australia was somewhat protected from the GFC by its "four pillars" banking policy, which prevents the four major Australian banks from merging, and also insulates them from foreign takeover. The aim of this policy is to retain some level of competition in a small national market.

Although Australian banks did have some exposure to toxic US securities, this was much less than if they had been owned by the Lehman Bros and Morgan Stanleys of the international banking system.

Banking regulation also remained more robust than in the US.

The TISA financial services chapter is an ideal vehicle for the global banks' resistance to increased regulation. The rubric of removing barriers to trade and investment is used to prohibit any limits on foreign investment or numbers of investors, and minimise national regulation. This is completely contrary to the logic of the four pillars banking policy.

If the Australian Government wanted to retain the policy, it would have to be listed as "non-conforming measure" or an exception to the agreement, and there would be pressure to roll it back over time. If the Australian Government were to agree to roll back the four pillars policy, Australia would be far more vulnerable to a future global financial crisis.

The draft shows that the most extreme proposals come from the US where the resistance to banking regulation has been greatest. The US proposes a "standstill" on domestic financial regulation, which would prevent governments from introducing new regulation in the future. For example, the previous ALP government addressed the lack of consumer protection in the financial advice industry through the FOFA legislation, which the current Coalition Government is now trying to weaken by amendment.

If the amendments are successful, and Australia agrees to standstill provisions in TISA, a future government may not be able to introduce stronger regulation to protect consumers.

The draft also refers to dispute settlement, and it is not clear whether this is government-to-government dispute settlement, or the ability of foreign investors to sue governments in an international tribunal if a law or policy harms their investment. Global companies have advocated for the right of foreign investors to sue governments to be included in trade agreements. The Philip Morris tobacco company is currently using this right in an obscure Hong Kong investment agreement to sue the Australian Government for millions of dollars over plain packaging legislation.

Whether or not investor rights to sue are included in the final TISA agreement, we know there is a chapter on financial deregulation in the TPP, and that the US also wants to include investor rights to sue in the TPP.

The Australian Government has said it is prepared to negotiate investor rights to sue in the TPP. This would mean that a foreign bank investing in Australia could sue the Australian Government if it introduced new regulation that the bank believed would harm its investment. This would undermine our democracy and sovereignty.

The Australian Government should oppose financial deregulation and investor rights to sue in TISA, the TPP and in all trade agreements and should end the secrecy by publishing the text of all agreements for full public and parliamentary debate before Cabinet makes the decision to sign them.

This article was published by The Drum. View the original article here