The Committee appreciates the Taiwanese government’s consistent dedication to fostering the development of the asset management industry in Taiwan, as well as establishing advanced regulations and an open market that aligns with current trends.

In addition, the Committee would like to thank the Financial Supervisory Commission (FSC) for accepting some of our 2021 White Paper suggestions, including permitting ESG funds to be launched in Taiwan and providing relevant ESG disclosure guidelines. We are also grateful for the FSC’s openness to feedback from asset management companies, which has helped in shaping the policies and regulations for this industry. To further develop the industry, the Committee this year proposes several commercial, legal, and regulatory changes, and looks forward to continuing its collaboration with the FSC to create a resilient and vibrant investment market in Taiwan that benefits both domestic and international investors.

We thank the government for its consideration of these five suggestions, all of which taken together would enhance investment opportunities for investors and promote the further development of the Taiwan asset management industry.

Suggestion 1: Maintain the current regulatory framework for investment in non-investment-grade bond funds through ILPs and ILPs managed as DIM accounts.

The Committee is concerned that the proposal to restrict investments in non-investment-grade bonds through ILPs and ILPs managed as discretionary investment management (DIM) accounts would be counterproductive to the intended purpose of such investment channels.

Non-investment-grade bond funds (NGBF), formerly called high-yield bond funds, are an important option for investment-linked insurance policy (ILP) holders’ long-term investment planning. Such funds are part of a holistic investment asset allocation and are essential to developing a diversified portfolio.

In major markets, general retail investors are able to subscribe to NGBFs as they are not considered a special type of fund in those markets. These funds have several characteristics that make them a sensible choice for ILPs and ILPs managed as DIM accounts. In addition, the risk-reward (RR) rating of NGBFs is generally lower than that of most equity funds or specific geographic/country/thematic funds. In fact, over the last decade, non-investment-grade bonds have for the most part had better RR ratings than stocks or investment grade bonds. Moreover, non-investment-grade bonds have been significantly more resilient to past interest-rate increases than other bond types.

In addition, NGBFs may hold hundreds or even thousands of bonds, which dilutes the impact of the default of any individual bond within the fund and differentiates its default risk from that of a single non-investment-grade bond.

In times of market turmoil, appropriate inclusion of NGBFs in policyholder portfolios can balance risks and increase returns. The proposal to exclude such bonds from being used as underlying assets of ILPs and/or ILPs managed as DIM accounts would materially affect the reasonable risk allocation and investment options of policyholders. Furthermore, such a proposal would not be conducive to long-term investment or risk diversification, as policyholders would instead pursue higher-risk investments.

Also, most DIM accounts opened by insurance companies for ILP investment are multi-asset and do not invest in bonds directly but rather in funds or exchange-traded funds (ETF). Most such accounts are equipped with risk-control mechanisms and follow asset investment ratio guidelines to diversify risk. NGBFs are only one investment instrument among many in a DIM account.

Lastly, we note that the issues with NGBFs that have been reported by the media have more to do with regulatory compliance with know-your-customer (KYC) obligations than with product design or investment risk.

Taking the investment performance and risk tolerance of policyholders into account, we suggest that as the government implements enhanced measures to protect the rights and interests of policyholders of ILP and ILPs managed as DIM accounts, it also ensures sufficient flexibility and the freedom to choose investment instruments through continuing to allow investment in NGBFs.

Suggestion 2: Encourage Taiwanese citizens to prepare for their retirement as early as possible through long-term investments.

The Securities Investment Trust and Consulting Association (SITCA) last year proposed the establishment of Taiwan Individual Savings Accounts (TISA) to encourage citizens to begin making mid- and long-term investments for the future. However, the proposed tax benefits for these accounts would only apply to Taiwan-domiciled equity funds (including Taiwan ETFs) for which domestic Taiwan securities (including those for listed and OTC companies) must constitute at least 70% of the fund’s net asset value.

The Committee proposes that the government instead consider a suggestion raised in its 2020 White Paper by granting each fund investor (including investors in both onshore and offshore funds) an income tax deduction of not more than NT$24,000 per year as a tax incentive to make investments for retirement, along the same lines as the tax deduction for life insurance premiums. This tax incentive will not only help the general public voluntarily prepare for retirement by encouraging them to start savings planning at an early stage but will also serve as a buffer for underfunding of relevant government pension funds, thereby benefiting the entire society. The tax incentive would also help promote the government’s recently launched retirement-focused fund platform.

Suggestion 3: Increase ef for ts to sign a double taxation treaty with the U.S. to reduce the withholding rates on dividends received by SITE funds investing in the stocks of U.S. companies.

Although Taiwan has signed tax treaties with approximately 30 countries, that list does not include the U.S., one of Taiwan’s top investment targets. As a result, Taiwanese companies (including domestic funds offered and issued by securities investment trust enterprises (SITEs) in Taiwan) that invest in securities issued by U.S. corporations and receive dividends are subject to 30% withholding, three times the 10% rate in countries that maintain tax treaties with the U.S. (such as Japan). This has caused a significant performance gap that could make Taiwanese SITE funds less attractive to Taiwanese who wish to invest in the U.S. stock market or intend to invest in U.S. stocks.

In view of the above, we recommend that the government step up efforts to sign a tax treaty with the U.S. as soon as possible. Such a treaty would not only enhance the competitiveness of products offered by Taiwanese SITEs but would also incentivize Taiwanese companies to invest in the U.S. and promote a friendly atmosphere in which the U.S. is also willing to invest in Taiwan. Further, it would facilitate industrial cooperation and technology exchange between the two sides, as well as encourage R&D and innovation and create job opportunities, thereby promoting mutual economic growth and leading to a reciprocal, win-win situation.

Suggestion 4: Allow sub-mandating of third parties to manage overseas assets under DIM accounts.

Clients of DIM businesses possess professional investment capabilities and judgment, and should therefore be accorded a lower level of supervision. However, unlike SITE funds, which are subject to stricter supervision but are permitted to sub-mandate third parties, DIM accounts are currently prohibited from sub-mandating third parties to handle their overseas investments. This is an unnecessary restriction from a policy perspective. Moreover, the laws of neighboring Asian countries (including Japan, Korea, Singapore, and Hong Kong) do not prohibit such activity. Lifting the restriction would not only make the entire investment process for DIM accounts smoother and more efficient but would also be in line with international asset management standards.

Suggestion 5: Exempt the subsidiaries or branches of foreign asset management firms in Taiwan from outsourcing regulations or simplify the application process.

To develop a consistent approach to regulating the asset management industry’s outsourcing activity, the FSC has drafted “Regulations Governing Internal Operating Systems and Procedures for the Outsourcing of Asset Management Industry” (the Regulations). While the Regulations are well-intentioned, we note that foreign asset management firms in Taiwan share the same operational frameworks and computer systems with their headquarters/parent companies or group affiliates located overseas and need head office/parent company assistance to implement those systems. This practice is called “insourcing” and is very common at international firms.

The Committee therefore proposes that the subsidiaries or branches of international asset management firms that insource activity to their overseas headquarters/parent companies or affiliates be exempted from the Regulations. If exemption is not possible, we suggest simplifying the outsourcing application for such firms by, for example, allowing the relevant parent company/head office/group affiliate to submit only the following two documents: (i) a letter consenting to a Taiwan regulatory audit and (ii) a statement certifying that no infringement of customer interests or any personnel misconduct, information and technology security event, or other occurrence has had a negative impact on business operations in the last three years, in lieu of requiring all of the documents stipulated in the current draft Regulations.

The above approach would not only effectively encourage international asset managers to invest in Taiwan, protect the authority of the FSC’s previous outsourcing-related regulations, and reduce the negative impact on existing outsourcing matters, but would also avoid inconveniencing Taiwanese investors during the implementation phase of the Regulations.