2020 was the most challenging year the world economy The Committee wishes to thank the Taiwan financial authorities for paying extra attention to our recommendations in the 2021 Taiwan White Paper and taking meaningful actions in response. Gratifying progress was made on the suggestions “Digitalization – create a national data repository to streamline financial processes” and “Relax guidelines and the relevant Q&A for foreign banks to outsource IT systems.” We also note that the Financial Supervisory Commission (FSC) plans to relax Article 4 of the “Regulations Governing Issuance of TWD Bank Debentures by Foreign Bank Branches” to allow the proceeds of TWD financial debentures issued by foreign bank branches to be used in sustainable finance.
In this year’s paper, we have focused on four main points that are aligned with major FSC objectives. These are 1) Promote digitalization of the banking sector, 2) Relax the current guidelines on outsourcing IT systems, 3) Exempt Formosa Bond liquidity providers from two-way firm quote requirements, and 4) Allow High-Asset Customers/Professional Investors to be exempted from Debt Burden Ratio 22 (DBR22) requirements.
We believe that all these objectives can be met within the coming year. Given the FSC’s desire to expand Taiwan’s financial market and increase employment opportunities, the first step should be to allow more services to be made available to additional types of customers in Taiwan. We look forward to continued liberalization that will attract more foreign institutions to participate in the market and bring more business opportunities to Taiwan from neighboring financial markets such as Hong Kong, Singapore, and elsewhere. The result will be enhanced competitiveness for Taiwan’s financial sector and greater ability to retain talent and develop the industry.
Suggestion 1: Promote digitalization of the banking sector.
1.1 Revise regulations on digitalizing banking services. Although online application processes for deposits and credit extensions are generally open for consumer banking, the corporate banking business faces certain restrictions.
1.1.1 Under the “Model Guidelines for Processing an Online Deposit Account Opening Application” (Model Guidelines), online account applications for corporate banking are limited to “sole proprietorship” companies registered under the Business Registration Act and owned by natural persons of ROC nationality over the age of 20, as well as “partnerships” registered in accordance with the Company Act and owned by no more than three natural persons of ROC nationality over the age of 20.
In addition, the Model Guidelines do not allow identity verification by a foreign certification service provider for opening a digital account. These restrictions present problems for banks wishing to adopt mainstream international documentation certification practices as well as for multinational corporate customers seeking to open digital accounts for deposits.
1.1.2 The FSC has accepted the Bankers Association’s proposal to clarify the requirements for corporate clients when giving consent for financial institutions to check credit information online with the Joint Credit Information Center (JCIC), and relaxed the restrictions on executing loan agreements online by existing, and certain new (i.e., limited to companies owned by no more than three natural persons of ROC nationality, excluding those with any corporate shareholders), corporate clients in June and July 2021, respectively. However, other types of new corporate clients are still unable to apply for corporate loans online and must go through a time-consuming, in-person application process which may also give such new corporate clients less flexibility in their choice of banking services from different financial institutions with which they have yet to build business relationships.
1.1.3 Furthermore, Article 8 of the Security Design of Transaction Types in the “Guidelines for Security Measures of Financial Institutions for Electronic Banking Services” requires clients to upload their ID card images to their financial institutions when starting an online personal loan application process, and again during the online contract sign-off process, resulting in unnecessary duplication. To streamline the application process, we suggest allowing financial institutions to solicit their clients’ ID card images for verification just once for each online application case.
1.2 Enable clients to access digital banking services more conveniently through MyData information applications. Clients who wish to use personal information provided by the Department of Household Registration under the Ministry of the Interior by using MyData can verify their identities only with a Citizen Digital Certificate, ATM Card, Hard Certificate (level 1), or TW FidO (level 2). To make the identity authentication process more convenient, we propose:
• Adding National Health Insurance cards and soft copies of financial certificates as identity verification options on the MyData platform.
• For clients who provide their personal information to financial institutions through MyData, make the information directly available to the financial institutions without requiring them to verify that information. The increased convenience would encourage more clients to use MyData.
1.3 Ease restrictions on the use of e-signing and e-submissions for contract execution. The COVID-19 pandemic has forced changes in corporate clients’ operations and working models, accelerating such trends as remote working and the use of e-signing. To sign and transmit documents, many large multinational corporate clients use e-signing platforms that are not restricted by working hours and locations. We offer two suggestions to help meet client needs and follow these international trends:
• For new and existing corporate and individual customers, allow recording-enabled video conferencing applications/tools as one of the approved channels for conducting identity verification and witnessing signatures.
• Allow financial institutions to adopt an e-signing platform to transmit documents to corporate and individual customers and to obtain necessary signatures.
Suggestion 2: Relax the current guidelines on outsourcing IT systems.
2.1 Clarify the concept of “same outsourcing reason” in the FSC’s Outsourcing Q&A. This issue refers to the one raised in last year’s Taiwan White Paper under the heading “Relax guidelines and the relevant Q&A for foreign banks to outsource IT systems” and in subsequent discussions during the latest FSC-foreign bank liaison meeting in December 2021.
According to Question 2.2 in the Q&A, no additional application for outsourcing approval is required for a new IT system if the “same outsourcing reason has previously been approved and the service provider is the same.” Last year, the Committee pointed to various scenarios in which the definition of “same outsourcing reason” requires further clarification. For example, where a bank that had already received FSC approval for a data-processing function aimed at corporate and institutional clients later wishes to engage in a similar activity aimed at wealth management clients, the purpose of the data-processing activity is the same and there should be no need for another FSC approval for extending the scope from one category of clients to another.
Also, foreign bank branches and subsidiaries often outsource IT systems to their parent bank, head offices, or regional offices. As long as the service provider is within the bank’s global network and is the same as the one previously approved, it should meet the criteria for “same service provider” under Question 2.2.
Removing any doubt regarding the interpretation of these (and similar) points will help foreign bank branches and subsidiaries expedite outsourcing planning schedules and reduce the FSC’s review workload.
2.2 Relax documentation applicability for cloud outsourcing applications. Outsourcing by foreign bank branches and subsidiaries involving cloud technology follows the same outsourcing practice as mentioned in 2.1 above. That is, a branch or subsidiary of a foreign bank in Taiwan will generally use the cloud service provider contracted by its head office or parent bank. After the group contract is signed, the branch or subsidiary in Taiwan will then roll out the service on a project basis. To maintain flexibility for the global project, the group contract normally does not specifically list the foreign branches or subsidiaries included within its scope.
We note that the current outsourcing regulations require the cloud service provider to provide a separate audit consent letter to Taiwan regulators. However, in terms of the contractual structure and from the cloud service provider’s perspective, the foreign bank branch or subsidiary is not a separate contracting party. As a result, the audit consent letter is difficult to obtain, and the cloud outsourcing application timeline gets prolonged.
The problem could be resolved on the basis that, as long as there is an audit consent clause in the group contract obligating the cloud service provider to comply with the audit consent requirement, the head office or parent bank (rather than the cloud service provider) may issue an equivalent document to the Taiwan regulators confirming the right to audit.
We therefore suggest expanding the scope of Question 3 of the Cloud Outsourcing Regulation FAQ to explicitly state that, under such circumstances, audit consent letters from the cloud service provider may be replaced by an equivalent document issued by the bank head office or parent bank.
Suggestion 3: Exempt Formosa Bond liquidit y providers from two-way firm quote requirements.
To invigorate the trading activities of international bonds listed on the Taipei Exchange (TPEx), TPEx in 2016 introduced a liquidity-provider mechanism and required issuers of international bonds to designate liquidity providers for each international bond transaction and provide quotes during the trading period in accordance with the “Rules Governing Management of Foreign Currency Denominated International Bonds” (the “Rules”).
In addition, TPEx promulgated the “Directions Governing Liquidity Providers of Foreign Currency Denominated International Bonds” (the “Directions”) for securities dealers and banks without a concurrently operated securities dealer business to apply for a liquidity-provider license and follow the relevant provisions in providing price quotes.
The Directions require liquidity providers to continue providing two-way firm quotes through the International Bond Trading System (IBTS) on a daily basis for international bonds with an issuance tenor of seven years or less, unless and until the liquidity provider has cumulatively sold bonds equal to 10% of the original issuance amount. By comparison, a liquidity provider for structured international bonds is only required to report reference quotes for bonds it does not hold.
In current primary international bond-trading markets, bonds are typically sold out on the issuance date. Thus, underwriters hold no position in the bonds, while investors tend to hold the bonds until maturity. In such circumstances, if an underwriter is also the designated liquidity provider in accordance with the abovementioned Rules, it is required to provide two-way firm quotes, even when it holds no position. Under these circumstances, when the offer quote provided by the designated liquidity provider is hit, the liquidity provider will be exposed to default risk, and market order will be adversely affected.
We therefore suggest that the authorities:
1. Exempt liquidity providers from providing two-way firm quotes whether or not the 10% threshold has not been met; or
2. Allow the provision of reference quotes to be handled in line with the practice for structured international bonds.
Suggestion 4: Allow High-Asset Customers/Professional Investors to be exempted from Debt Burden Ratio 22 (“DBR22”) requirements.
In 2020, the FSC issued the “Regulations Governing Banks Conducting Products and Services for High-Asset Customers” with the objective of building an international wealth management platform able to compete with other APAC financial centers like Hong Kong and Singapore while satisfying High-Asset Customers’ investment and wealth management needs. The FSC has also included Professional Investor (“PI”) provisions in various guidelines governing different types of financial investment products so as to differentiate control measures on investments made by different types of clientele. These regulatory measures lead to differentiated management of various client types (i.e., non-Professional Investors, Professional Investors, and High-Asset Customers) for various investment products and wealth management/planning schemes.
In the private banking/wealth management sector, leveraged investment is a common investment strategy. However, such a leveraged strategy, when adopted by an individual, is subject to Debt Burden Ratio 22 (DBR22) restrictions, while a personal investment vehicle used by an individual is not. We recommend that banks lending to private individuals who qualify as High-Asset Customers or PIs be exempted from the DBR22 requirements for the following reasons:
1. The rationale behind DBR22 is to protect banks by preventing them from granting excessive non-secured credit facilities to retail clients rather than to restrict leveraged investments in the private banking/wealth management sector. High-Asset Customers/PIs, by definition, possess sizable wealth and sufficient financial knowledge to manage their credit risk.
2. High-Asset Customers/PIs usually accumulate wealth through investments that do not necessarily generate stable and recurring monthly income. Furthermore, non-secured credit facilities granted by banks to High Asset Clients/PIs are not assessed based on monthly income. Rather, bank evaluations of whether a client qualifies as a PI or High-Asset Customers are based on the client’s total wealth.
3. High-Asset Customer and PI investments are monitored based on each individual bank’s existing collateral management and margin-monitoring processes and, in actual banking practice, DBR22 requirements intended for retail customers may well not be as effective as these internal measures designed for High Asset Customers/PI in mitigating credit risk for such clientele.