The Proposed Financial Services Act

1. The Proposed Financial Services Act Sheng-Cheng Hu Chairman, Financial Supervisory Commission March 4, 2008

2. Outline • Recent Development of Taiwan’s Financial Sector • Globalization • Liberalization efforts • Legislative Initiatives • The Proposed Financial Services Act (FSA) • Legislative purposes • Legislative strategies • FSA defined as a special law • Conclusions

3. Recent Development of Taiwan’s Financial Sector

4. From Crisis to Rapid Growth • In 2007, the financial sector enjoyed a growth rate of 7.91%, compared with the better-than-expected growth rate of 5.70% for the overall economy. • The 7.91% growth rate, highest since 1998, was made possible despite the following challenges encountered by the economy in the year: • The China-Rebar crisis broke out in January. • The economy continued to be plagued by the credit card problem in the first quarter and was affected by the subprime mortgage problem in the second half of the year. • Several distressed banks had to be taken over to avoid bank runs

5. Globalization (1) • Foreign Acquisitions of Taiwanese banks • Five Taiwanese banks were acquired by international banks : Hsin-Chu bank (Standard Chartered), BOOC(Citi), Taitung Business Bank (ABN Amro), Chunghwa (HSBC), Bowa (DBS) • Three Banks had foreign boards of directors: Cosmos bank, Ta Chong Bank, Entie Bank • UBS, Mizuho and others have applied for additional or new branches. • 8 out of 14 FHCs now have more than 30% of foreign shares • The market share of foreign banks and banks under foreign control rose from 4.56% by 11.24 pts to 15.8%, compared to 8% for Korea (2004 data). • Increasing foreign participation in Taiwan Stock Exchange • Foreign shares in Taiex market value rose from 16% in 2001 to 34.5% in 2007.

6. Globalization (2) • Expansion into foreign markets by Taiwanese banks and insurance companies • 18 applications were filed by Taiwanese banks for permission to establish overseas branches in Southeast Asia, India, Australia and Canada. (Overseas branches and OBUs contributed to 85% of profits of Taiwanese banks in 2007) • 4 applications from insurance companies for FSC permissions to establish branches in Vietnam: Cathay Life, Nanshan Life, Fubon Insurance, and Union Insurance.

7. Globalization (3) • Liberalization of financial investment in China • 4 insurance companies (Cathay-Century,Taiwan Life, Cathay Life and Shinkong Life) received permission to establish subsidiaries in China • Domestic funds were allowed to invest in H shares and red chips • Possible relaxation of restrictions on indirect financial investment in China by Taiwanese banks.

8. Liberalization Efforts • Insurance • Launching of investment-type insurance policies and insurance policies denominated in foreign currencies • The percentage of assets allowed to invest overseas was raised from 35% to 45% (to 40% in the first year) • Securities • New ETFs, futures and other derivatives • IPO of overseas companies (under planning) • Banks: • Fee-income business (wealth management) • Relaxation of OBU activities (under consideration)

9. Legislative Initiatives • Accomplishments in 2007 • Overhaul of Insurance Law • Overhaul of Accountant Law: Greater power and accountability for accountants to improve financial transparency • Financial Company Law • Under review by the LY • Expanded channels for raising funds • Financial companies will be under less restrictive regulation than banks • Financial Services Act (FSA) • Final draft before submitting to the EY

10. The Proposed Financial Services Act (FSA)

11. Legislative Purposes • Provide legal basis for integrated regulation of banking, securities and insurance: • Transition from “institutional” regulation to “functional” regulation. • Banks, securities firms and insurance companies can compete on equal footing • Prevent supervisory and regulatory arbitrage • Shift from the US “rule-based” regulation to British “principles -based” regulation • Improve protection of investors and consumers • Strengthen risk management at financial institutions • Facilitate financial product innovation • Address the shortcomings of current laws (i.e., Banking Law, Securities and Exchange Law and Insurance Law)

12. Legislative Strategies • Big-Bang approach • Complete all changes at once. • Time consuming • Gradual approach • To achieve consolidation of regulations in stages • First stage: to harmonize legislations on wealth management across the banking law, the securities and exchange law, and the insurance law

13. FSA defined as a Special Law • The proposed FSA is defined as a special law that takes priority over the banking law, the securities and exchange law, and the insurance law, so as to harmonize regulations under the three laws and related acts.

14. Principles-based Regulation (§10) • Duty of care and duty of royalty • Treat customers fairly, and avoid conflicts of interest • Reinforce corporate governance • Maintain sound financial and business operations: Particularly risk control

15. Differential Regulation • To encourage good corporate citizenship and to ensure optimal supervision, the FSA will give explicit authorization to the FSC to exercise differential regulation of financial institutions. Financial institutions with good business practice and good corporate governance will benefit from less regulatory supervision and more management discretion

16. Separation between Financial and Industrial Sectors • To ensure that financial institutions avoid conflict of interest, the proposed FSA will require that they should focus on their core businesses and not get involved in the management of non-financial businesses in which they invest.

17. Negative-list Approach to Financial Product Review (§12) • To encourage financial innovation and facilitate launching of new financial products, the proposed FSA will provide legal basis for allowing financial institutions which comply with the “principles of regulation” to launch new financial products without prior approval or with minimum supervision.

18. Regulation of Financial Derivatives • Current laws do not give FSC explicit statutory authorization to regulate in areas such as (1) derivates and (2) wealth management. The proposed FSA will address these shortcomings by giving FSC the statutory power to protect investors and consumers

19. Suitability of Financial Products • To prevent financial institutions from promoting high-risk products to retail investors, the proposed FSA will require financial institutions to recommend to customers only financial products suitable for them, and the financial institutions should adopt their own codes of conduct governing product recommendations.

20. Obligation for Clear Explanation of Financial Products • To maintain information symmetry, the proposed FSA will require clear explanation to the customer prior to sale if a product could directly cause a loss to principal or otherwise materially affect the buyer. Where no explanation is given, the financial institution must bear absolute liability for damages. • However, to reduce their operating costs, the proposed FSA will also allow more relaxed regulation of sales to • Professional and institutional investors • Persons who clearly state that they need no explanation

21. Proportionality Principle of Administrative Penalty • Current laws stipulate that persons involved in misconduct can only be discharged or let free regardless of the seriousness of the misconduct. • The proposed FSA will allow a lesser penalty by suspending such persons from their positions for a period of time consistent with the seriousness of their misconduct.

22. Administrative Settlement Provisions • To relieve financial institutions of the costs generated by lengthy administrative and court procedures, the proposed FSA will follow the US Sarbanes-Oxley Act by allowing for fee-based administrative settlement as an alternative (under certain conditions) to other forms of administrative sanctions.

23. Self-reported Violations • To encourage voluntary reporting of violations and to reduce the cost of financial supervision, the proposed FSA will allow reduced fines for those who self-report violations.

24. Conclusions • The proposed FSA will pave the way for transition to principles-based regulation, thereby relaxing regulation of the financial industry, facilitating its development • The proposed FSA will integrate regulations on banking, securities and insurance, reduce regulatory arbitrage , and thereby promote competition on equal footing • Your support is needed in the review of the FSA at the LY.

25. Thank you