A problem of plenty

With the US-China trade war likely to divert even more funds into Taiwan, the island’s financial regulator faces mounting pressure to open the market further to relieve stresses forming in the system. The Asset spoke with Wellington Koo Li-hsiung, chairman of the Financial Supervisory Commission, in an exclusive interview, to gauge his thinking.

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31 Oct 2019

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When news broke in September 2017 that Koo was being appointed as the new head of Taiwan’s most powerful financial authority, the Financial Supervisory Commission, more than a few eyebrows were raised. Even his wife, Wang Mei-hua, Taiwan’s deputy minister of economic affairs, was reportedly shocked.

Koo’s lack of financial background and reputation as a tough no-nonsense lawyer who previously headed the Executive Yuan’s Ill-Gotten Party Assets Settlement Committee, tasked to recover ill-gotten wealth from the Kuomintang Party, suggested to some that there were dark days ahead for an industry that was in desperate need of reinvigoration.

Two years on, not only has the worst not come to pass, but Koo seems to have even converted a few sceptics. When The Asset sat down with him at his office in New Taipei City’s Banqiao District, the FSC chairman was fresh from signing off on the launch of Taiwan’s first three virtual banks (see related story). He had also moved quickly to clamp down on the buying binge by asset-hungry local life insurance companies of foreign currency denominated securities, which ballooned to over 67% of total investments by September 2018.

To be sure, Koo’s greatest disadvantage when he became the FSC chairman is turning out to be his winning ace. A top executive at a financial holding company praised him for having moved swiftly to defuse a ticking time bomb in the insurance market last year as record foreign exchange losses as a result of overseas investments topped NT$230 billion (US$7.4 billion) at the end of 2018 following losses of NT$176.9 billion in 2017 as the local currency weakened against the US dollar. Because he did not carry baggage — being an outsider — one line of thought is that Koo took action much faster than expected.

He is also seen as a positive force encouraging innovation in financial services. Koo describes his views on fintech as mature. He wants to encourage financial companies to develop their fintech expertise, with the FSC leading with policy initiatives. Second, he would also like to find ways to engage technology companies to enter the financial market.

Koo admits that the FSC, like other regulators in the region, is having to keep up with technological changes without necessarily having all the skillsets to do so. The FSC, he believes, can offset this challenge by tapping on the talent pool available at the Taiwan Stock Exchange and Taiwan Depository and Clearing Corporation to augment the agency’s supervisory oversight.

Excess liquidity
From the industry’s standpoint, Taiwan is an island swimming in excess liquidity. Years of consistent growth, especially during the island’s heydays when it was an export powerhouse, means Taiwan has fostered a strong cash-rich middle class, not to mention its fair share of ultra-high-net-worth individuals that own factories in China and elsewhere in Southeast Asia.

According to the European insurer Allianz in its recently published global wealth report, Taiwan now ranks second in Asia, behind Singapore and ahead of Japan, in net asset per capita at US$107,045.

The problem is that interest rates onshore are very low at less than 1%. Cash-rich Taiwanese are offered few financial products to invest in. Regulation is tight and therefore excess cash often ends up in what seems the most popular and permissible product. For example, it is not uncommon for an investor to own multiple life insurance policies - and not necessarily with protection as the ultimate objective.

This rapid growth of the life insurance market worries Koo. “Insurance became a good place to soak up this excess liquidity. But the insurance industry has grown too fast. Taiwan is a very small place and with NT$29 trillion in total insurance assets, this amount is too much for the local market.”

The sharp acceleration in the number of fixed income exchange-traded funds last year, which spiked 900% to reach a record high of over NT$400 billion and become Asia’s largest, is not lost on Koo.

Together with the erstwhile demand for foreign currency denominated securities, he is well aware there is one big buyer: life insurance companies in Taiwan. “These kinds of investments involve foreign exchange risk” given that the premiums are mostly denominated in the local currency.

Insurance clampdown
As the regulator, he intends to continue to address the elevated risks. “First, insurance premiums cannot grow too fast. Even if the life insurance companies want to see it grow, they [insurance companies] have to develop in the right direction and for the right purpose. These companies need to prepare better insurance products. The definition of better is that they need to have a higher level of protection.”

The FSC, he continues, wants to also look into the marginal profit of an insurance product to determine whether it is too high. From the design to the selling process, he wants to tighten up the regulations. “The government will take action. It will likely slow the insurance premium income. Instead, we want to encourage insurance products with a higher proportion of protection such as pensions insurance.”

Battling the surge of funds into the insurance market, however, is also a symptom of the FSC’s own conservative approach to opening the market for new products. Koo is aware of this conundrum and looks at it from the legal perspective, which is what he knows best. “If you compare Taiwan with Hong Kong, for example, Taiwan does have disadvantages. Hong Kong operates under common law; it is very open to financial products. It may ban a few, which it deems illegal. But in principle, everything else can be done.”

In the case of Taiwan, there is also the real-world perspective. “When the futures market fell last year on February 6, investors complained and asked why the government did not protect them,” he points out. “Local investors feel the government will protect them from market risk.” Under such circumstances, he explains that the government will be more cautious about the financial products that are made available to the general investor base.

Financial opening
Koo’s solution, which some industry participants are in favour of, is to segment the market and make a wider range of financial products available to sophisticated professional investors who meet minimum capital thresholds. “We are now studying how we might be able to proceed. We are open to this idea.”

He takes a similar approach on how best to regulate the banking industry. Recently, the FSC designated five banks as domestic systematically important banks (D-SIB). “Large institutions should adopt risk-based and risk-oriented management and strengthen internal controls including conducting self-audits. If these institutions are recognized as such, then the frequency of supervision, the regulator’s approach to their business development, and the offering of new financial products can be appropriately relaxed,” says Koo.

Koo says that the FSC is now reviewing the process of making available more choices for qualified sophisticated investors drawing from the experiences of financial openness in Hong Kong and Singapore. “We have received a lot of opinions. But there are issues such as foreign exchange controls in Taiwan. We need to communicate and coordinate with the central bank.” 

Date

31 Oct 2019

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