TheCityUK and the City of Corporation – Supplementary Written Evidence (JTN0045)

Executive summary

1. The Corporation and TheCityUK welcome the opportunity to respond jointly to the House of Lords EU International Agreements Sub-Committee inquiry on the UK-Japan Comprehensive Economic Partnership Agreement (CEPA). TheCityUK is the industry-led body representing UK-based financial and related (FRPS). The industry contributes more than 10 per cent of UK GDP and employs over 2.3 million people. It is the largest taxpayer, the biggest exporting industry and generates a trade surplus greater than all other net exporting industries combined. The City of London Corporation works closely with a wide range of stakeholders to promote UK-based FRPS. These include the Department for International Trade (DIT), HM Treasury, the Foreign, Commonwealth & Development Office and London and Partners. The common goal is to sustain prosperity and stimulate economic growth in London and across the UK through global trade and investment.

2. On 31 August 2020, TheCityUK submitted evidence to the House of Lords EU International Agreements Sub-Committee (“initial evidence”) setting out FRPS priorities in the then ongoing negotiations for the UK- Japan CEPA.

3. The City of London Corporation also submitted evidence to the same inquiry, highlighting that enshrining a framework for regulatory cooperation dialogues in a trade agreement would provide greater regulatory and market certainty for ongoing regulatory cooperation and would clearly signal firm commitment to a continued collaborative spirit between these two governments and economies.

4. Now that the CEPA is finalised, this submission assesses how far it realises FRPS priorities.

5. TheCityUK and the City of London Corporation would be happy to provide further detail on any of the issues raised in this response.

Introduction

6. The UK and Japan share similar views on open trade and the need to maintain the global rules-based trading system. The two countries also benefit from strong bilateral trading ties in services – £13.1bn in 2019 – and especially in , which accounted for 56% of all UK services exports to Japan in that year. TheCityUK, in its initial evidence, suggested that the CEPA should build on this already strong relationship, securing provisions that embed open trade, and especially trade in services, as much as possible, and avoid protectionism.

7. The industry called for the agreement to focus on maintaining the levels of services trade liberalisation achieved by the EU-Japan Economic Partnership Agreement (EPA), improving financial regulatory cooperation, securing a framework to progress the mutual recognition of professional qualifications (MRPQ), strengthening temporary business travel, and achieving agreement on digital trade issues. The finalised CEPA text reflects these priorities, maintaining and, in some areas, strengthening the EU-Japan EPA provisions. The sections below outline how the agreement addresses industry priority areas.

Digital trade

8. Digital trade is increasingly important. Half of services trade is digitally enabled and Covid-19 has only accelerated the trend towards e- commerce.1 Despite this, restrictions on digital trade have doubled in ten years.2 Data localisation measures are particularly concerning for financial services businesses because they can make it harder for businesses to comply with regulatory requirements related to fighting financial crime. Anti-Money Laundering (AML) and Know Your Customer (KYC) assessments are most accurate when a complete data profile of potential customers can be examined; localisation makes this harder to achieve. Localisation measures are a barrier to international trade and investment in that they can result in significant additional costs for UK businesses looking to operate in different markets. For all of these reasons, the FRPS industry is eager that trade agreements help stem the flow towards localisation.

9. TheCityUK called for the UK-Japan CEPA to include a joint UK-Japan commitment not to adopt data localisation measures (including in financial services) except in clearly defined conditions. The EU-Japan EPA had not included such a provision. It is encouraging that the final CEPA text contains a shared commitment from the UK and Japan to allow the free flow of data with no requirement for localisation as a condition for doing business. Importantly, under the agreement Japan cannot restrict a UK financial service supplier from transferring data from Japan (and vice versa), and, subject to certain regulatory

1 Data Free Flow with Trust (DFFT): Paths towards Free and Trusted Data Flows (World Economic Forum, June 2020), p8 available at: http://www3.weforum.org/docs/WEF_Paths_Towards_Free_and_Trusted_Data%20_Flow s_2020.pdf 2 VOX, Centre for Economic Policy Research (CEPR) Policy Portal, “The cost of data protectionism”, 2018; World Economic Forum, “Exploring International Data Flow Governance”, White Paper, 2019. safeguards, UK financial services suppliers cannot be obliged to store financial data in Japan.

10. The CEPA also sets out rules to ensure legal frameworks are in place to protect personal information on the internet. TheCityUK and the City of London Corporation welcome the commitment of both countries not to impose customs duties on electronic transmissions, and the CEPA provisions supporting the recognition of e-signatures in either jurisdiction. The protections the CEPA provides for confidential information relating to software, source codes, and encryption technologies are also welcomed. Given the growing threat of cyber- crime to the UK’s increasingly digitalised economy, both organisations support the UK and Japan’s agreement to maintain regular bilateral dialogue around cybersecurity and other digital economy issues.

Regulatory cooperation

11. Regulatory cooperation is critical for the FRPS industry: most barriers to trade in services are regulatory in nature. Some regulatory divergence results from countries differing in their public policy priorities. But much divergence is accidental: different countries’ authorities seek the same outcomes but structure regulations differently, inadvertently creating trade barriers. Regulatory cooperation can remedy against this. Both TheCityUK and the City of London Corporation called for the UK-Japan CEPA to set out new arrangements to help embed further cooperation with Japan on financial regulatory matters.

12. The CEPA provisions on financial regulatory cooperation follow the EU-Japan EPA in most respects, creating a framework for voluntary regulatory cooperation. The framework includes provisions encouraging UK and Japanese regulators to work to achieve mutual compatibility of their regulatory and supervisory frameworks for financial services in areas of common interest and to develop consistent regulatory approaches on an outcomes basis. Regulators are encouraged to defer to the regulatory and supervisory frameworks of the other Party.

13. In some respects, however, the CEPA marks an improvement on the EU-Japan EPA on financial regulation. The CEPA established a UK- Japan Regulatory Forum to assess progress on regulatory cooperation and conduct forward planning. The Forum is structured similarly to the EU-Japan Regulatory Forum, but whereas the EU-Japan Regulatory Forum only included the European Commission and the Japanese Financial Services Authority (JFSA), the UK-Japan Forum includes HM Treasury, of England, and Financial Conduct Authority representatives as well as the JFSA. The inclusion of UK regulators most directly involved in overseeing the UK financial services industry should help the forum to function effectively.

14. The UK-Japan Regulatory Forum creates a framework to facilitate future collaboration between regulators on issues such as sustainable finance and approaches to new financial services. It has the potential to provide great value to the future UK-Japan trading relationship by steering greater regulatory cooperation, although it will take some time before it will be possible to assess its effectiveness. Notably, while the EU-Japan Regulatory Forum has a mandate to provide “guidelines on reliance on each other's regulatory and supervisory framework”, the UK-Japan Regulatory Forum has a mandate to provide “guidelines on deference to each other’s regulatory and supervisory framework.” This change in language reflects the attention that the CEPA places on encouraging regulatory deference between the UK and Japan.

15. The CEPA, like the EU-Japan EPA before it, includes a framework for the mutual recognition of professional qualifications which encourages UK and Japanese regulators to consider whether they can recognise the professional expertise and standing of practitioners from either country. As with the UK-Japan Regulatory Forum, there is much potential in this MRPQ framework agreement to increase trade in professional services, but it is not yet possible to assess its effectiveness.

Movement of people

16. Access to talent is one of the FRPS industry’s priorities. Free trade agreements (FTAs) often include provisions which facilitate the movement of services suppliers from one country to another to conduct temporary work (GATS Mode 4). In a joint report, International Trade Agreements and UK Immigration Policy (September 2020), TheCityUK and EY set out how the UK could use its independent trade policy to secure migration agreements, while noting that to date most FTAs, EU agreements included, have not been very ambitious on Mode 4.

17. Against this background, it was encouraging that the DIT’s negotiating mandate with Japan included calls to “secure opportunities for UK services suppliers and investors to operate in Japan through provisions for temporary business travel.” The CEPA not only locks in the EU-Japan EPA commitments on the movement of highly skilled workers and intra-corporate transfers but goes beyond them in some areas. Both countries have improved their commitments on the temporary movement of highly skilled workers. Japan has expanded the scope of their intra-corporate transferee category to allow more UK service suppliers to enter the country. The UK has made greater provision for Japanese investors to visit the UK and has agreed to match Japanese commitments on visa processing within 90 days.

18. The changes that provide for increased cooperation in this space are welcome. The CEPA brought an expansion of visa categories covering the temporary movement of highly skilled professionals, and some adjustments in the definitions of “investors” (for labour mobility purposes) which shift the focus from capital to industry impacts and job creation. These provisions could indicate that business mobility is seen by both UK and Japanese governments as something that supports job creation.

Market access, investment protection and intellectual property

19. TheCityUK called for the CEPA to allow for as much market access in FRPS as possible, and to include transparent, stable and predictable rules governing investment. The sections in the agreement on market access and investment liberalisation cover similar ground to the EU- Japan EPA. TheCityUK and the City of London Corporation welcome the additional market access provisions in the CEPA which expand the terms under which UK financial service suppliers can offer new financial services on the same basis as Japanese companies. The prohibitions on foreign investor equity caps, joint venture requirements, economic needs tests, performance requirements, restrictions relating to the corporate form of a service-supplier and residency and nationality requirements for certain business personnel provide guarantees against discriminatory treatment.

20. The CEPA does not set out investment protection provisions, although there is a clause that enables either party to request that this be reconsidered. As the UK and Japan share similar values and policy goals when it comes to investor protections, it was hoped that the CEPA could provide the groundwork for future UK FTAs. The FRPS industry would benefit from the increased certainty that investment protection would provide.

21. The shared values and policies of the UK and Japan surrounding intellectual property are reflected in the expansions of the provisions in CEPA. This includes upholding a wider selection of international treaties, expansion of enforcement procedures, and a commitment to simplify trademark registration. The increased protection and streamlined process provides much needed certainty to firms and will help support cross-border innovation.

Legal services 22. Although the CEPA does not add specifically to existing market access provisions retained from the EU-Japan EPA relevant to legal practice in Japan (such as establishment, registration as a foreign lawyer, and ability to provide advice in home country and international law), gains outlined above on digital trade as well as the strengthening of text on domestic regulation are both relevant to the legal profession.

23. Of greater impact to the legal profession has been the recent changes to Japan’s Foreign Lawyers Act which ease experience requirements for registration as a foreign lawyer and allow foreign lawyers to act in a broader range of arbitrations.

Conclusion

24. The CEPA delivers on certain FRPS industry priorities for the future UK-Japan trade relationship and provides UK businesses with some new opportunities to benefit from strengthened UK-Japan services trade ties. It is important to note, however, that the task of achieving stronger UK-Japan trade ties did not end with the conclusion of CEPA negotiations. Much work still needs to be done to establish regulatory dialogues between the UK and Japan on a range of issues of great importance to FRPS, including the mutual recognition of professional qualifications. It is not possible to provide a full assessment of the effectiveness of this trade agreement until more progress has been made on the outstanding regulatory issues identified. Even then, the CEPA will only form one part, if an important part, of a strong network of ties that link the UK and Japan.

25. The CEPA has a broader significance in that it is the UK’s first major new post-Brexit trade agreement, and therefore could potentially set the tone for other agreements to follow. In “Future UK Trade and Investment Policy: TheCityUK Submission” (January 2017), strong emphasis was laid on the need for the UK’s trade policy to reflect the importance of services to the UK’s economy (80% of UK GDP). The submission called for policymakers to be unhesitatingly innovative in seeking ambitious agreements that cover services trade areas that have sometimes been overlooked – including regulatory cooperation, digital trade, government procurement, immigration, investment protection and intellectual property rights. The government has been clear that it sees services trade as a priority for UK trade negotiations and is currently pursuing services trade asks in negotiations with the US, Australia and New Zealand, as well as reviewing its economic modelling to ensure that it can place more reliance on accurate and up to date data on UK services trade. 26. The UK-Japan CEPA marks an important first step in the UK’s development of a pro-services trade policy. Given the tight timelines of negotiations, and the existence of a recently agreed EU-Japan EPA, it is unsurprising that the CEPA stays close to the EPA precedent in most respects. But the new developments on regulatory cooperation, immigration and digital trade are movements in the right direction, and achievements that the UK should seek to build on in subsequent agreements.

6 November 2020