Todd has a long and detailed post on the negotiating history of the GATS prudential measures provision, which is in Article 2(a) of the GATS Annex on Financial Services. He really dug deep on this one. I'm not sure there's anything left to uncover.
Here's the provision:
2. Domestic Regulation
(a) Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.
Todd makes the point that there are four possible interpretations of the this provision:
[The provision] provides no defense under any circumstances and that a WTO panel would have to give it no weight: no prudential policies are allowed.
[The provision] imposes no constraint under any circumstance: every allegedly prudential policy is allowed.
[The provision] has to mean SOMETHING. Lawyers are not politicians, and they require every clause in an agreement to have legal effect (known as the "effectiveness" principle). WTO tribunalists would look to the ample jurisprudence from GATT Article XX and GATS Article XIV, which lays out a host of ways in which countries can violate GATS under certain conditions, like when a measure is "necessary to protect human, animal or plant life or health."
This interpretation starts from the point of view that financial services firms were the most active proponents of GATS in the first place, and "regulators" in developed countries were often more interested in exporting financial services than in defending domestic regulations. For this reason, we would expect the WTO rules on financial services to be less protective of financial services policy space than, say, retail services policy space. Financial firms pushed hard for the toughest disciplines, and created different tiers of obligations for concentric circles of coalitions of the mostly unwilling, the mostly willing, and the most willing.
Under this interpretation, the PMD is "self-cancelling" in certain ways, but not in others. Early in the negotiations, rich countries pushed for dozens of ways to restrict countries' financial regulations, but many countries balked at the more extreme rules.
The "compromise" by the end of 1991 was that countries could choose not to commit financial services, but when they did, they would have to meet a "minimum" set of rules: market access and national treatment. (We discuss the also important free transfers obligation elsewhere.) In essence, these rules state: thou shall not impose size limits or bans; and thou shall not discriminate. They could not utilize any excuse or exception not to comply.
But violations of other GATS rules would be allowed... for prudential reasons. Indeed, if you could prove that a measure was prudential, you wouldn't have to meet the disciplines under Article VI, entitled "Domestic Regulation". That article says that, even if a measure passes muster under Article XVI (market access) and XVII (national treatment), it must still, among other things, not be more trade restrictive than "necessary."
If I understand interpretation 4 correctly, I think what he is saying is that under this interpretation, the prudential measures provision provides a defense to violations of some provisions (such as GATS Article VI), but does not provide a defense to violations of GATS Article XVI and XVI. He sees support for this view in the negotiating history. His analysis too long to repeat here, so check it out and judge for yourself.
All very interesting, but upon reading the provision again, I'm sticking with the interpretation I set out here:
The first sentence suggests that Members can take measures for "prudential reasons," even if these measures would otherwise violate other GATS provisions. So, let's say you have a measure that violates GATS Article XVI (Market Access). If that measure is taken "for prudential reasons," including the ones listed, it is permitted despite the Article XVI violation. (Presumably there must be some objective determination as to whether the measure is actually "for prudential reasons," such as a means-ends test applied to the measure and the stated policy goal, rather than just accepting the Member's declaration of the purpose without further scrutiny.) This part looks like a pretty typical WTO "exception."
The second sentence narrows the scope of this "exception" to some extent. (In a sense, the debate here is over how much it has been narrowed). In this regard, the second sentence states that if the measures at issue do violate other GATS provisions, they are not completely off the hook when they are found to be "for prudential reasons" under the carve out, as there is a legal obligation that still applies: "[the measures] shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement." This language seems a bit like the GATT Article XX chapeau trying to root out "disguised restrictions." In particular, the requirement that such measures not be used as a "means of avoiding ... commitments or obligations" has a similar feel. "Avoiding" is not quite as strong as "disguised," but it's along the same lines. Basically, both the second sentence here and the Article XX chapeau indicate that the non-protectionist purposes offered to justify the measure must be authentic.
The problem is, the second sentence of the prudential carve out is worded a little more confusingly than the chapeau. The sentence starts with "[w]here such measures do not conform with the provisions of the Agreement." This language is somewhat duplicative of the "[n]otwithstanding any other provisions of the Agreement" language from the first sentence. Implicit in the "notwithstanding" language is that there was a violation of the other provisions. Restating this point in the second sentence as "[w]here such measures do not conform" makes it seem like this is an additional obligation not to violate the GATS which applies subsequent to the application of the first sentence. I think that's why Global Trade Watch takes such a broad view of the meaning of the second sentence: "prudential measures are only allowed under GATS rules if they don’t violate any of the GATS rules." I see how they get to that conclusion by focusing on the first clause of the second sentence, but I'm not sure that's right. Rather, as noted above, I think the better interpretation is that the second sentence corresponds to the chapeau, emphasizing that any measures taken for the stated policy reasons not be disguised trade restrictions (or here, measures taken to avoid commitments or obligations). The "[w]here such measures do not conform with the provisions of the Agreement" language just recalls the violation implicit in the "notwithstanding" language in the first sentence. To be more clear about it, the first part of the second sentence could have been written as "[w]here prudential measures that do not conform with other provisions of the Agreement have been used," or something along those lines. That's what the "such measures" refers to, in my view. It just doesn't do it very clearly.
I suppose my interpretation falls under his intepretation 3 category, although I would characterize it simply as an approach where you take some confusing treaty language and look carefully at the ordinary meaning, not too unlike the consideration of most other WTO terms.