Moving the industry from product-focused selling to advisory by ensuring product suitability, focusing on customer solutions, and improving financial advisors’ skills to provide portfolio solutions to achieve long-term financial goals.
The Committee greatly appreciates the efforts and vision of the Financial Supervisory Commission (FSC) in 2018 in steering the calculation of sales incentives towards an assets under management (AUM)-based method effective from 2020. This change is a crucial breakthrough for the asset management industry. It will help reduce fund churning and assure a sounder investment environment for all industry participants and investors.
The Committee also notes with thanks the FSC’s recent relaxation of restrictions applied to offshore funds and onshore funds. The ratio of an offshore fund’s investment in China’s securities market has been raised from 10% to 20%. Onshore and offshore bond funds’ investment ratio in high-yield bonds was elevated to the same percentage as well. The Committee looks forward to continuing the collaboration with the FSC in creating a more flexible legal framework for both onshore and offshore products. Hopefully this cooperation will further improve the competitiveness of Taiwan’ onshore funds and enable them to keep up with global trends in terms of investment strategy.
The FSC’s initiative in introducing the member choice retirement investment pilot scheme demonstrates a strong resolve to help solve the difficulties faced by the Labor Pension Fund. The Committee welcomes the FSC’s innovative approach and, as elaborated on in Suggestion 1 below, hopes that the design of the pension reform will be aligned with global practice such as the 401(k) plan of the United States and Hong Kong’s and Australia’s pension funds. Such an arrangement will allow more asset managers to take part and contribute to the diversification of investment solutions provided to employee-investors.
As always, the Committee is dedicated to working closely with the FSC to bring beneficial changes to the asset management industry and to maximize the best interests of investors in Taiwan.
Suggestion 1: Relax the restriction on opposite transactions when the investment decision of the onshore fund is delegated to a third party.
Laws and regulations regarding securities investment trust funds and discretionary investment mandates impose restrictions on making opposite transactions – that is, selling in one managed fund while buying the same holdings in another managed fund – (1) when a fund manager concurrently acts as the investment manager of the discretionary investment mandate or vice versa, (2) when the fund manager manages more than one fund, or (3) across various investment accounts managed by the same management company. Under such restrictions, unless specific requirements are met or otherwise approved in advance by the responsible supervisor within the management company, investment accounts are not permitted to engage in opposite transactions in the underlying investments.
However, it is not expedient to apply such restrictions when overseas investment management functions of a securities investment trust fund are delegated to a third-party institution. As the delegated institution and the management company in most cases are located in different time zones, the delegate frequently cannot execute an opposite investment trade until it obtains prior approval on the following business day from the responsible supervisor based in the management company. This delay affects the performance of the fund and prejudices the investors’ rights and benefits, which is contrary to the objective of delegating a fund’s foreign investment functions in the first place.
Furthermore, where overseas investment management functions have been delegated by a securities investment trust fund, the actual decision-maker of the investment is neither the management company nor the fund manager. Therefore, no conflict of interest is involved.
The Committee requests that the FSC relax the restrictions on opposite transactions made by securities investment trust funds the overseas investment management functions of which have been delegated to a third-party institution so as to reduce the costs arising out of inter-institutional and cross-time-zone trading controls and allow for efficient management of the fund assets, seize investment opportunities in timely fashion, improve investment performance, and pursue the utmost interests of investors.
Suggestion 2: Continue to promote a “member choice” plan as the best option for pension reform.
Private school teachers have now been able to choose their own pension system for six years. This development has provided a good model for the future creation of a more flexible pension system for civil servants and labor. Also noteworthy is Fund Rich Securities’ “National Pension Project,” which allows participants to invest in a regular and disciplined way. The participants benefit from the hands-on investment experience that enhances their awareness of wealth management and the importance of pensions.
After the recent reform of the military and public servant annuity system, there has been increased discussion about labor pension reform. One important source of pension for workers in Taiwan is the New Pension system, the investment return on which is backed by the government. To moderate the potential future financial burden on the government and provide more choice for workers, the best option – and also the one most in line with international trends – is a “member choice pension scheme.” It also provides a good opportunity to educate members of the public on the workings of a pension system. To test the advantages of a member-choice pension scheme, various securities-related institutions in Taiwan, including the Securities Investment Trust & Consulting Association (SITCA), are working together on the “National Pension Project.” This Project will begin a two-year experimental period in the second half of 2019, aiming at 10,000 participants with products to be provided by three fund companies.
Instead of suspending labor pension reform while waiting for the results of the Project, continue to seek ideas for different approaches.
In carrying out the Project, avoid placing too many restrictions on investment objects (asset pools) and fund types (fund of funds only). Excessive restrictions will defeat the purpose of adopting a “member choice” system and reduce the willingness of workers to participate. Instead, focus on setting high-level principles and encouraging product diversity.
Build an open platform to allow more financial institutions and more workers to participate. The local industry has limited experience in building retirement products, so more participation from international players is important to help the market mature. Limiting the number of participants allowed to provide retirement products will also mean people have less choice and will therefore be less willing to invest. An open market with a diverse group of asset management participants will ensure a healthy market for investors. The rules should focus on creating robust criteria for suitable retirement products, not on limiting the number of participants.
Encourage all financial and educational institutions to get involved in providing the public with pension and wealth management education. People need to be armed with sufficient knowledge and information to properly prepare for retirement, and the more industry participants involved in the education process, the faster investors will become better educated.