Jurisprudence for prudential measures in international trade in financial services

Prudential measures are financial regulations for consumer protection, soundness of financial institution and stability of financial markets A prudential measure is the most powerful affirmative defense since it prevails over all obligations and commitments under international treaties as long as it is not abused. A host state has a wide discretion in regulating prudential measures and thus is tempted to use them as non-tariff trade barriers. Furthermore, prudential measures would result in regulatory expropriation and thus a host state would be obliged to compensate a foreign investor's loss. Therefore, this paper is to develop a standard of review for jurisprudence on prudential measure in order to prevent abuse of prudential discretion. In addition, this paper aims to prove that prudential measures are not subject to regulatory expropriation and compensation as long as they fall within police power. In order to develop an appropriate standard for prudential discretion, this paper reviewed various standards regarding abuse of discretion such as a good-faith principle, margin of appreciation, state of necessity and fair and equitable treatment. The common criterion applicable to all standards above is a good-faith principle. Therefore, a prudential discretion also must meet the following requirements deriving from a good-faith principle: (i) prudential purpose, (ii) reasonable relationship between prudential purpose and a taken measure, and (iii) balance between secured prudential supervision and impaired interest. Regulatory expropriation is a host state's substantial interference with a foreign investor's property or with the investor's legitimate expectation. Regulatory expropriation requires compensation unless it falls within police power. Police power is the exercise of a state's regulatory discretion which is conducted in a good-faith manner. This police power does not amount to a significant deprivation of a investor's property compared to a secured public interest, and thus is not subject to compensation. In fact, a regulatory expropriation hardly exists in financial services because financial services are heavily regulated to the extent that foreign investors would expect that their investment will be interfered by a host state for prudential reasons. Furthermore, prudential carve-out can be a good defense against regulatory expropriation because a state's regulatory action for prudential reasons is likely to fall within the police power.