The Modalities and Guidelines adopted for services sector negotiations under the African Continental Free Trade Area (AfCFTA) are unlikely to lead to significant increases in financial services trade on the Continent This is because many market access and discriminatory barriers have already been removed either unilaterally or in the GATS context, and because of the nature of both the financial sector (highly regulated) and the scheduling arrangements (positive listing and with exemptions). However, if carefully drafted and implemented, the regulatory cooperation components of the AfCFTA agreement may contribute more to achieving a single, continental financial services market. There are several areas where member-states could focus to achieve the most benefit from the regulatory aspects of the Agreement:

• Encouraging harmonisation measures – including recognition, exemptions and passporting (a licence or permission is based on the same rules and accepted in all participating countries).

• Creating binding parameters for cooperation such as regular meetings and obligations to share material changes before they are implemented.

• Creating conditions to support liberalisation – including cross-border consumer redress, and cooperation on supervision and enforcement (particularly information exchange).

Regulatory cooperation and harmonisation?

Even if services markets are liberalised fully, the vast majority of restrictions or barriers to trade in services are not market access barriers or discrimination against foreign suppliers, or not merely attributable to these kinds of measures, but rather, fall into the sphere of domestic regulation. This means the regulatory cooperation component of the Agreement will have to do the heavy lifting of facilitating increased trade in services across the continent.

This will be particularly the case for the financial services (banking, financial and insurance) sector, as it is already one of the more liberalised services sectors at the unilateral level. This means commitments in the services schedule are likely to either lock in existing practice or even leave some space for policy changes (that is, increased barriers). Consequently, the scheduled liberalisation will not necessarily result in any meaningful increase in access to the financial sector across all modes of delivery.

According to the text of the Protocol on Services, along with scheduling commitments, members will also engage in regulatory cooperation and develop sectoral disciplines, based on best practice in the RECs. The text further provides that members will support the negotiation of mutual recognition agreements and that members commit to transparency of regulation.

Under the Roadmap for the AfCFTA negotiations, member states will develop Regulatory Frameworks in all services sectors by 2021. Technical discussions on the frameworks will take place across the course of 2020. In the case of the financial sector (financial services and insurance) there are several areas where members could focus their efforts to maximise the opportunity for financial services trade.

Harmonisation

Regulatory heterogeneity is a major barrier to cross-border expansion across all modes of delivery for financial services businesses. Even when regulatory regimes are open to foreign entrants, including in particular via commercial presence (mode 3) and cross-border supply (mode 1) and have transparent and efficient licensing procedures, in many cases, while regulatory goals don’t differ (ie. financial sector development, financial stability, consumer protection, financial inclusion), the way the regulatory authorities seek to implement these goals can vary significantly.

Many harmonisation measures are underway at the REC level, and indeed, it is here that harmonisation is mostly likely to be successful as RECs members share closer ties in legal, economic, linguistic and social spheres. Nevertheless, to realise a single continental market, this harmonisation needs to be extended more broadly.

A good start would be in areas of new financial services and products, for example, crowdfunding, mobile money, crypto-finance and sustainable finance. New financial services provide something of a clean slate when it comes to regulation, so are good candidates for harmonised rules at the continental level.

An additional area for focus would be the harmonisation of less material requirements, such as the form and format of regulatory reporting. Here, significant efficiency improvements can be achieved without any ceding or compromising of policy space. This is where regulatory technology (‘regtech’) has real potential. Regtech will eventually enable real-time monitoring of financial services providers. Being able to share and access that monitoring across borders will significantly improve the ability for regulators to ensure their policy and regulatory goals are met, but this will only work if the technology is interoperable.

Finally, when considering candidates for harmonisation measures, members should focus on smaller firms. Larger financial services providers are demonstrably able to navigate cross-border trade and multiple regulatory regimes – with more resources, more connections and more capacity to temporarily absorb losses than smaller providers. In addition, smaller providers are likely to carry far less systemic risk. As such, the focus of recognition should be on smaller providers, including broker/dealers; advisers; insurance intermediaries and payments providers

Measures such as recognition and exemption require deep understanding of the regulatory requirements in a partner country, as well as trust in the partner country’s regulatory environment. To achieve this kind of harmonisation a solid base of cooperation will be essential.

Cooperation

As annexes to the Services Protocol, the regulatory frameworks will form an integral part of the AfCFTA agreement, and thus be binding on member states.

This means that cooperation measures can, depending on the drafting, create binding obligations. Even if these obligations only extend to regular meetings between supervisors and policy-makers it will provide a strong impetus to increase cooperation and give more force to non-binding commitments such as those in MoUs between regulators (which exist and are important but are not sufficient). While MoUs remain important to thresh out the technical details of cooperation, a commitment to cooperation can give the political push needed to start the engagement, or to ensure regular meetings occur and MoUs are updated.

In addition, it will oblige countries where the existing framework inhibits cooperation to eliminate measures such as prohibitions on sharing information.

It is important to recognise that particularly in the financial sector, efforts towards harmonisation and regulatory convergence are also happening outside of the trade environment. The Basel Committee on Banking Supervision, the International Organization for Securities Commissions and the International Agency for Insurance Supervision promulgate sets of core principles for regulation in their respective sectors. Closer to home, OHADA, for example strives to harmonise business law largely in Francophone Africa. Recognising these existing mechanisms, along with those existing in the RECs will alleviate workloads and result in greater coherence with global regulatory principles.

Creating the conditions for liberalisation

Regulatory frameworks are not only a valuable tool to reduce barriers to trade, but because the regulatory frameworks are scheduled to be in place before the finalisation of services negotiations, there is potential for the regulatory disciplines and cooperation to give comfort to State Parties to liberalise certain services sectors.

For example, if partner countries have adequate consumer data protection rules in place, and commit to sharing information with one-another, regulators will be more comfortable in reducing access barriers. Similarly, if a regulator is confident that the home country will share information to support supervision, the regulator will feel more confident in hosting a subsidiary of that financial service provider.

Final thoughts

Over time, model laws such as those in the EAC and regional supervision, such as the WAEMU Banking Commission could be developed for the AfCFTA as a whole, but at this point less ambitious, but nevertheless practical and achievable harmonisation and cooperation will go a long way to encouraging the flow of financial services on the Continent.