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.
Global Trade Watch puts its specific concern this way:
As the second sentence makes clear, prudential measures are only allowed under GATS rules if they don’t violate any of the GATS rules, which are very expansive.
I'm not sure that's quite right. Let me run through this provision briefly.
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.
Having offered that interpretation, I must admit that I do think the language is a bit vague and hard to pin down, and could be construed otherwise than I've suggested. It would be nice to have it stated more clearly. Along these lines, here's what Global Trade Watch suggests as a replacement provision:
2. Domestic Regulation
(a) Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from adopting or maintaining measures relating to financial services it employs for prudential reasons, including for the protection of consumers, investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial services supplier, or to ensure the integrity and stability of the financial system. For greater certainty, if a Party invokes this provision in the context of consultations or an arbitral proceeding initiated under the Dispute Settlement Understanding, the exception shall apply unless the Party initiating a dispute can demonstrate that the measure is not intended to protect consumers, investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial services supplier, or is not intended to ensure the integrity and stability of the financial system.
As I see it, this is the same basic idea, just stated a little more clearly, and also the burden is placed on the complainant to demonstrate that the measure is not being used for the policy purposes the respondent says it is about.
