2020 was the most challenging year the world economy has faced in many decades. The novel coronavirus which spread into a global pandemic exacerbated economic conditions and shook financial markets at a time when the global economy was already slowing. Due to effective leadership by the government and health authorities, Taiwan showed its tenacity and resilience in controlling the pandemic. As a result of the exemplary performance, Taiwan’s economy was one of the few in the world to see GDP growth.
To reduce the impact of the uncertain global conditions, the government has taken steps to liberalize Taiwan’s financial sector. For example, the Financial Supervisory Commission (FSC) promulgated “Regulations Governing Banks Conducting Financial Products and Services for High-Asset Customers” to develop wealth management services for such customers. The FSC also deserves credit for adopting policies aimed at upgrading the competitiveness of Taiwan’s financial sector by promoting financial technology (fintech), developing green finance, and boosting corporate governance to strengthen companies’ role in sustainable development.
We look forward to continued liberalization to attract more foreign institutions to participate in the market and bring more business opportunities to Taiwan from neighboring financial hubs.
The Committee particularly wishes to thank the Taiwan financial authorities for paying extra attention to our recommendations in last year’s Taiwan White Paper and taking meaningful follow-up actions. Gratifying progress was made on several issues. For instance, the FSC loosened affiliate trading restrictions on the sales and trading activities of banks and securities firms. It also relaxed the loan loss reserve and guarantee reserve requirements for foreign bank branches in Taiwan.
In this year’s paper, we have focused on four main points that are in line with major FSC objectives. These are 1) digitalization, 2) the relaxation of outsourcing guidelines, 3) the enabling of proceeds from foreign bank branch-issued TWD financial debentures to be used in sustainable finance, and 4) the start of regulatory planning for Taiwan’s sustainability-linked bonds (SLB) scheme.
We believe that all these objectives can be met within the coming year. In view of the FSC’s desire to expand Taiwan’s financial market and increase employment opportunities, the first step in that effort should be to allow more products to be made available to additional types of customers in Taiwan. In this way, Taiwan’s financial industry will become more competitive vis à vis neighboring financial markets such as Hong Kong and Singapore, and the ability to retain talent and develop the Taiwan industry will be enhanced.
Suggestion 1: Promote digitalization by adopting more flexible regulations on online corporate banking services, establishing a national data repository, and enabling e-signing and e-submissions.
1.1. Revise regulations on digitizing corporate banking services. The current online application processes for deposits and credit extensions are mainly open to consumer banking businesses only. As per the “Model Guideline for Processing an Online Deposit Account Opening Application” (the Model Guideline), the online account application for corporate banking is limited to “sole proprietorship” companies, registered under the Business Registration Act and owned by natural persons of ROC nationality over the age of 20.
The “Guidelines for Security Measures of Financial Institutions for Electronic Banking Services” state that new and existing customers may use online services to: 1) apply for personal loans, 2) increase housing or car loans within the amount secured by an existing mortgage, and 3) give consent for financial institutions to check credit information online with the Joint Credit Information Center. However, new corporate customers are unable to apply for corporate loans online and must go through a time-consuming, in-person application process.
In addition, under the Model Guideline the identity verification method that can be used to open a digital account does not accept international certificates or electronic signatures, which creates obstacles for non-residents and multinational corporate customers in opening digital accounts. In addition, the relevant approved certificate technology is limited to hardware devices and cannot be integrated with the current international mainstream certificate or electronic signature technology. As a result, multinational corporate customers have found it difficult to adopt this local solution.
The FSC has assigned the Bankers Association to draft relevant guidelines and management mechanisms for opening digital online corporate accounts and applying for corporate loans. We appreciate the Commission’s efforts. If this issue can be solved, it will help Taiwan stay abreast of the demand for digital financial services.
1.2. Create a national data repository to streamline financial processes.
Based on current business and Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations, banks are required to collect various paper documents when implementing Know Your Customer/Client Due Diligence (KYC/CDD) measures. Certain paper documents are needed for tasks such as validating identities using reliable, independent source materials; witnessing signatures; opening corporate accounts; providing credit-extension services; and other transactions.
We suggest that the National Development Council establish a corporate version of the MyData service (scheduled to go live this year) in order to provide corporate customers with a more efficient customer experience, optimize banks’ client-identity management, and lower operating risk. Such a national data repository would allow corporate customers to download company information such as certified copies of certificates of registration/incorporation; articles of incorporation; lists of responsible persons, directors, supervisors, shareholders, or ultimate beneficial owners; lists of affiliates/groups; tax registrations; income tax payment certificates; financial statements; proof of payment of utility bills, and other relevant information. In addition, through online authorization, corporate customers could also allow government agencies or non-government agencies to access their company information and allow for customized digital services as required by the company.
Banks could use such a corporate version of MyData as a reliable source of information for identity verification when corporate customers open corporate accounts or apply for loans. This would further provide corporate customers with a seamless interface and enable digital identity verification. The replacement of paper documents for corporate account opening and loan applications through such a version of MyData would be a major step forward in enhancing banking efficiency in Taiwan.
1.3. Permit e-signing and e-submissions in the contract execution process. The COVID-19 pandemic has forced changes in the operations and working models of corporate customers, and some existing trends have been accelerated. Among them, remote working and the use of electronic signatures are the two most important changes. To sign and transmit documents, many large multinational corporate customers are using electronic signature platforms that are not restricted by working hours and locations. Many major international financial markets, in response to the needs of customers, have begun to use relevant electronic signature platforms to sign and deliver documents. This new working model is likely to become a mainstream trend in the future. The Committee offers two suggestions to help fulfill the needs of customers and follow the international trend:
Allow recording-enabled video conferencing applications/tools as one of the approved channels for conducting identity verification and witnessing signatures – applicable for both new and existing customers (including both corporates and individuals).
Allow financial institutions to adopt an electronic signature platform to sign and transmit documents with customers (including both corporates and individuals), in line with international trends and to support customers’ needs and behavior.
Suggestion 2: Relax guidelines and the relevant Q&A for foreign banks to outsource IT systems.
Foreign bank branches or subsidiaries’ IT infrastructure and back-office operations falling within the scope of the banking license or involving client data are generally outsourced to their head offices or regional offices to handle. Due to recent developments in regulators’ supervision of head office operations and in regional office resource-integration planning, foreign bank branches and subsidiaries have an increasing need for different types of outsourcing requiring application for FSC prior approval or post-notification to the FSC.
It is natural for foreign bank branches and subsidiaries to outsource IT systems to their head offices or regional offices. We therefore see the need to further clarify the concept of the “same outsourcing reason” given in the answer to Question 2.2 in the FSC’s Outsourcing Q&A. This approach is beneficial to both financial institutions and regulators because it allows financial institutions to expedite their outsourcing planning schedules while at the same time reducing the regulator’s outsourcing-application workload.
Currently Q2.2 is applicable only where the “the same outsourcing reason” 1) has been approved by the FSC or 2) complies with the 2012 remedial procedures, and 3) the service provider is the same. We wish to propose additional scenarios to be included in the Q2.2 Outsourcing Q&A to allow more flexibility. Here are two examples:
Scenario 1: System A was previously approved by the FSC for the purpose of anti-money laundering (AML) transaction monitoring for corporate and institutional clients, with the head office as the service provider. One year later, the bank plans to roll out System B for wealth management clients using the same monitoring. As the service provider (the head office previously approved by the FSC) is the same, and the purpose of data-processing activity (AML transaction monitoring) is the same, the concept of “same outsourcing reason” should apply, obviating the need for FSC pre-approval.
Scenario 2: System C was previously approved by the FSC for the purpose of PEP (politically exposed person) and sanctions name screening for corporate and institutional clients, with the head office as service provider. One year later, the bank plans to roll out System D, with the same screening, for wealth management clients. As the service provider (the head office previously approved by the FSC) is the same, and the data-processing activity (PEP and sanctions name screening) is the same, the case should not be subject to FSC pre-approval, considering that it is merely extending the client scope from corporate and institutional clients to wealth management clients.
These proposed examples conform to the spirit of Q2.2 of the Outsourcing Q&A since the foreign banks’ regional or head office are the majority service providers and the security control and business continuity plans remain unchanged.
Suggestion 3: Allow the proceeds of foreign bank branch-issued TWD financial debentures to be used in sustainable finance.
Sustainable finance is developing quickly in the world, and Taiwan is no exception.
The rapid development of green and transition finance, or sustainable finance in general, has been well noticed in recent years. Taking bond issuance as an example, the aggregate amount of new green, social, sustainability, and sustainability-linked bond offerings has reached US$482.3 billion in 2020, and the supply of these types of bonds is expected to collectively reach US$725.5 billion in 2021 for year-on-year growth of 55%.
In Taiwan, the FSC announced its Green Finance Action Plan 2.0 in August 2020. Initiatives under the updated scheme help better define green finance in Taiwan and bring sustainable investment practices on par with global standards. Specifically, Plan identifies such action items as:
Encouraging financial institutions to extend credits to sustainable development projects;
Encouraging financial institutions to invest in sustainable development projects;
Developing sustainability bonds in reference to the issuance framework and administration mechanism for green bonds; and
Studying the scope of sustainable finance in reference to international practices.
There is real need for sustainable finance in Taiwan, and it is becoming more and more urgent. At the same time, Taiwan is well positioned for development of this sector. It has a diversified borrower base that is increasingly serious about climate neutrality commitments, as well as an increasing number of local investment and lending institutions answering the call for responsible investment and lending.
However, current regulatory limits on the usage of TWD bond issuance proceeds discourages foreign banks from supporting sustainable finance activities in Taiwan, which in turn hinders development of the sector. Article 4 of the “Regulations Governing Issuance of TWD Bank Debentures by Foreign Bank Branches” provides that “The funds raised from the New Taiwan Dollar bank debentures shall be used for relevant financing of major public construction, offshore wind power (OSW) construction, and other construction of green energy industries in Taiwan as a general rule, and may not be exchanged to foreign currency.”
This clause effectively confines use of TWD bond issuance proceeds to financing major public borrowing or green energy projects, and blocks use of bond-issuance proceeds for lending to borrowers who want to use the money for ESG (Environmental, Social and Governance) or sustainable projects that are not “major” in scope or related to green energy.
This limitation directly affects the funding flexibility for foreign bank branches in Taiwan, and indirectly dampens their appetite for supporting non-energy-related green, social, or more general sustainable development projects in Taiwan. If banks want to support those sectors, they need to find TWD funding from other sources, adversely affecting foreign banks’ support for the Green Finance Action Plan 2.0.
Many foreign banks are experienced participants in the global ESG/sustainable finance market. Expanding the scope of use of bond proceeds will help banks bring global best practices to the local market.
Foreign bank branches in Taiwan have fully supported the Taiwan government’s renewable energy policies by providing billions of TWD loans to domestic OSW projects. Given their extensive experience in sustainable finance, these foreign banks would love to be even more active in this market, going beyond green energy to engage in financing all kinds of ESG initiatives.
Accordingly, we suggest expanding Article 4 of the Regulations to include “financing to entities for sustainability-related investment or expenditure.”
To define sustainability, regulators may refer to benchmarks they are familiar with, such as investments or expenditures needed to meet domestic or globally recognized sustainable finance frameworks. For example, under the Taipei Exchange’s sustainability bonds scheme launched in October 2020, the major constituents of sustainability related financing have been well established and made public. As a result, there seems to be little likelihood that the proposed expanded usage of bond proceeds would lead to inconsistent regulatory governance or regulatory arbitrage.
Suggestion 4: Begin regulatory planning for Taiwan’s sustainability-linked bonds scheme.
The International Capital Markets Association (ICMA) defines a sustainability-linked bond (SLB) as “any type of bond instrument for which the financial and/or structural characteristics (i.e., coupon, maturity, repayment amount) can vary depending on whether the issuer achieves predefined Sustainability/Environmental, Social, and Governance (ESG) objectives within a predefined timeline, and which are aligned with the five core components of the Sustainability-Linked Bond Principles (SLBP).”
As this definition highlights, SLBs provide financing to support improved sustainability and/or the ESG objectives of the issuers. However, unlike traditional Use of Proceeds Instruments (such as green bonds, social bonds, and sustainability bonds) where an issuer must commit the proceeds of bond issuance to specific purposes, SLBs do not limit the usage of bond issuance proceeds. Instead, pay-out on the bonds is linked to pre-defined sustainability targets set by the issuers (KPIs), or to the issuer’s ESG ratings, to encourage issuers to disclose the ESG KPIs at a corporate level (rather than project level) and have publicly disclosed targets to work toward.
The unique features of the SLB make it an important financing tool for issuers in Taiwan, and Taiwan is well positioned to develop this debt instrument. The vast majority of bonds issuers in Taiwan are not eligible to issue green bonds, sustainability bonds, or social bonds, due to the nature of their operations. These include companies engaged in fossil-fuel electricity generation, air and marine transportation, petrochemical production, and electronics manufacturing that consumes large volumes of energy. These issuers may wish to enhance their sustainability/ESG-related performance either voluntarily or under pressure from investors, but the traditional sustainable finance market does not allow financing to support those ambitions. As increasing numbers of local institutional investors look to make responsible investments, demand for sustainable bonds will pick up while that for non-sustainable bonds will decline. At some point in the future, the aforementioned issuers may find it more difficult to tap the bond market, presenting them with funding challenges.
As stated above, the proceeds of SLBs can be used for the general purposes of the issuers. Hence, SLB instruments, along with transition bonds, may become important future funding channels for companies aiming to create a more sustainable environment for their operations.
Potential changes in the bond financial and/or structural characteristics and the trigger events leading to such a change in SLBs was viewed in the past as a primary hurdle for efficient monitoring of bond payments for regulators, issuers, and investors. However, market developments in recent years have gradually addressed this problem. The underlying concept for SLBs is borrowed from that of structured notes, where investors may receive (i.e., issuers must pay) payments linked to an assessment of the issuers’ performance. Now more and more institutional investors are becoming acquainted with structured payments from their structured-note investments. At the same time, Taiwan regulators and issuers are building up experience with variable or step-up/step-down coupons and/or bonus payments upon maturity being linked to certain “events.”
With the available schemes for green bonds (2017) and sustainability bonds (2020) already in place, and the forthcoming launch of social bonds issuances (expected in 2021), SLBs appear to be the last piece needed to complete Taiwan’s sustainable-bond market roadmap. Together, all these instruments can further develop the key role that debt markets can play in funding and encouraging companies that contribute to sustainability (from an environmental, social, or governance perspective).
Considering Taiwan’s industrial composition, we are convinced that SLBs will play an even more important role than in other markets, and we urge regulators to start planning for this now.