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To date, while this workstream has gathered extensive survey results and other information with respect to branches, the record is devoid of any empirical information about subsidiaries and other legal forms and the issues which they pose for supervisors. In order to draw meaningful conclusions about the branch structure, it is necessary to compare it with alternative forms of legal entity by developing comparable factual information about such entities, e.g. subsidiaries, joint ventures, etc.
Especially where the paper makes assertions that there is a link between form of establishment and policyholder protection and financial stability, the paper is drawing conclusions without having enough material to build on. The literature states that from a supervisory perspective neither branches nor subsidiaries are clearly preferable, and there is no empirical data regarding how form of establishment impacts policyholder protection and (local or global) financial stability.
GFIA welcomes that the paper dedicates a section to commitments made under the General Agreement on Trade in Services (GATS) and the OECD Code of Liberalisation of Current Invisible Operations. This is important. A supervisor’s ability to set requirements on the legal form an entity under its supervision may take is bound by its jurisdictions’ financial service commitments. Given the importance of these commitments, we would like to see these considerations reflected more widely throughout the paper. In particular, every time reference is made to supervisors specifying legal form we believe reference should be made to a jurisdiction’s trade commitments, i.e. the language ‘if not in violation of a government’s international trade commitments’ should be added to the text.
The paper contains a detailed explanation as to the circumstances in which the a prudential carve out can be invoked; thereby explaining the circumstances in which a country can legitimately choose to take measures irrespective of financial service commitments made as described in the GATS. This is factually correct; however, we think it is important that, alongside this, the paper makes reference to the seriousness of a country invoking the prudential carve out. GFIA would not want to see it being applied without justification, as this would undermine the value and importance of jurisdictions’ international financial service commitments.
Although the improved language used in the current draft of the paper has removed much of the perceived bias seen in earlier drafts GFIA still believes the paper would benefit from a more balanced and empirical foundation. The literature review cites Cerutti, et al. (2007), for the proposition that bank "subsidiaries are more common in jurisdictions where political and economic risks are high so as to isolate the group from these risks" (para. 7), whereas Cerutti, et al. (2007), actually write "when it comes to risks stemming from possible government intervention and other major political events, parent banks are more likely to operate as branches" (p. 4). The preference of companies for establishing branches in countries posing political risk is supported by other studies and is not inconsequential. Developing countries are more likely than developed countries to pose political risk (particularly direct or indirect expropriation), but they are also more likely to be underserved. The freedom to establish branches encourages companies to operate in markets where insurance is most needed, benefiting households and businesses and contributing to economic growth and development. A bias toward subsidiaries may inadvertently discourage investment and hamper growth in these markets. Clearly, this is not the intent of the IAIS.
The paper would also benefit from clarification of whether the issues identified relate to events that have actually occurred and resulted in customer detriment, or are perceived issues that might conceivably arise. Indeed, there are considerations referred to in the paper, such as access to diversity of covers and protection, which could be better fulfilled by branches of parents with larger and better diversified balance sheets for reinsurance and commercial lines, than by a standalone subsidiary. This should be reflected in the overall tone and conclusions of the paper.
Given the statement in the Issues Paper that “In the future the IAIS should consider undertaking further work to more fully understand how cross-border operations through branches are supervised”, and in light of GFIA’s remaining concerns on the current paper, it is very important that a very high standard be applied, and further work, if any, must: