Digital trade provisions in FTAs – practical implications for the UK financial services sector
Why is digital trade important for financial services (FS) sector?
The FS sector underpins prosperity across the UK and around the world. Firms’ ability to sell services internationally is a key engine of jobs, growth and security. As a global financial centre, the UK’s international reach is unparalleled with it being the largest global exporter of financial services, generating a trade surplus of £63.7 billion in 2020.
What challenges do firms face?
Technology is revolutionising global services trade and the FS sector is already one of the most data intensive trading industries. The ability of firms to transfer data around the world is as important as the ability to sell services and move people.
Yet we are seeing an increase in governments and regulators restricting cross-border data flows. Whether this is the result of legitimate policy objectives or ‘digital protectionism’, these moves hinder digital services trade, driving ups costs and ultimately threatening global financial stability.
Can free trade agreements (FTAs) help to mitigate some of these challenges?
The UK Government needs to consider how its FTA agenda interacts with other policy mechanisms to encourage international cooperation on digital policy issues and deliver tangible benefits to firms.
Published by the City of London Corporation, in collaboration with Flint Global, ‘The Practical Implications of Digital FTA Provisions on the UK Financial Services Sector’ makes a series of recommendations for how the UK can develop a more holistic approach to these issues to achieve genuine services trade liberalisation:
- Involve financial regulators in defining negotiation terms and objectives
Regulator engagement throughout the negotiation process allows for a greater level of specificity in the negotiation and the direct linkage of trade provisions to existing and proposed regulatory interventions. Involving regulators to help develop the detail around their role within the agreement would also ensure that they have a vested interest in the full implementation of digital commitments and increase their level of comfort with commitments made.
- Build regulatory processes around specific concrete commitments
Carve-outs and exceptions mean that there is little obligation on financial services regulators to accommodate new FTA commitments. Trade agreements should clearly outline the conditions applicable to financial data, provide clarity on how terms should be interpreted by regulators, and be constructed in a way to limit the scope for de-facto data localisation.
FTAs should be supplemented by other trade policy tools such as joint regulator-to-regulator memorandums of understanding, which provide for closer cooperation and greater ability to share information
- Include a formal mechanism for firms to escalate complaints
UK FTAs should include a consultation mechanism for relevant stakeholders and firms themselves. Such a mechanism should have a formal governance framework that sets the process for good faith engagement and structured escalation, allowing stakeholders to flag and challenge both existing and emerging concerns.
- Prioritise data adequacy
Financial data is increasingly caught up in the rules governing the cross-border transfer of personal data. The ideal solution would be a global set of acceptable principles that would underpin an international outcomes-based approach to privacy and the free flow of personal data. In the immediate term, the UK should prioritise its own data adequacy agreements with like-minded partners that have high standards of personal data protection.
The stakes have never been higher. As we continue along the road to a post-Covid recovery, with global challenges including the Net Zero transition front of mind, and in the face of shifting geopolitical tensions, protecting and improving global FS firms’ capacity to trade across borders and provide services and capital to where they will deliver the greatest societal good will be a key determinant of success.