TAIWAN'S NEW FINANCIAL SUPERVISORY COMMISSION

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 004050

SIPDIS

STATE PLEASE PASS AIT/W AND USTR
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA
USTR FOR SCOTT KI
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
TREASURY FOR OASIA/ZELIKOW AND WISNER
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS,
AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: DECL: 12/16/2024
TAGS: PINR EINV EFIN ECON TW CH
SUBJECT: TAIWAN'S NEW FINANCIAL SUPERVISORY COMMISSION
(C-AL4-00965)

REF: A. STATE 267500


B. TAIPEI 2009

Classified By: AIT DIRECTOR DOUGLAS PAAL, REASON: 1.4 (C) and (D)


1. (SBU) Summary: Taiwan's Financial Supervisory Commission
has been very active since it was established in July 2004 to
encourage market liberalization and reform. Although some
foreign businesses have complained about difficulty in
keeping up with the flurry of new regulations, the
regulations are consistent with efforts to liberalize the
financial sector. The FSC emphasizes its status as an
independent agency, but has close ties to the ruling party.
End summary.

FSC Objectives
--------------


2. (C) The stated FSC objectives are internationalization
and deregulation of Taiwan financial sector, flexible
regulations and strong enforcement, and maintaining Taiwan's
financial stability. Long range FSC goals include passage of
new legislation including the Single Financial Services Act
and the Securities and Exchange Act (both awaiting
legislative action). FSC Chairman Kong Jaw-sheng said the
FSC fully supports President Chen's stated goal of reducing
the number of financial holding companies in Taiwan from 14
to seven within the coming two years. FSC International
Affairs Department Deputy Director General Andrea Lee told
AIT that the FSC was disappointed that the recent auction of
the Chung Hsing Bank had not attracted foreign bidders. It
remains a goal of the FSC to encourage foreign acquisition of
Taiwan banks.

Relations With Other Agencies
--------------


3. (C) There was confusion in some press reports regarding
the relationship of the FSC and the Ministry of Finance (MOF)
as well as the FSC responsibility for financial policy
making. Some reports indicated that this responsibility
shifted from the MOF to the FSC and back to the MOF. The FSC
was established in July 2004 as an independent regulatory
agency outside of day-to-day direct executive branch control.
The FSC chairman and its nine commissioners are nominated by
the Premier and appointed by the President for a fixed term
of office. While political affiliation is obviously a factor
in their selection, they are prohibited from participating in
political activities while in office. The executive branch
is still able to promote its financial policies through the
MOF, which it controls directly. AIT has explored this
issued in some detail with both the Minister of Finance and
the Chairman of the FSC and found them to be largely in
agreement on this point.

Political Connections
--------------


4. (C) While FSC Chairman Kong Jaw-sheng likes to emphasize
FSC independence, he had been personally closely associated
with President Chen and the DPP government prior to his
appointment as FSC Chairman. He helped organize a Taiwan
investment team to Europe in 2002 on behalf of the DPP
government while he was Taiwan country head of the Credit
Swiss First Boston (CSFB) and claims that subsequent pressure
from China on CSFB led to his separation from the bank. FSC
Vice Chairman Lu Tung-ying and FSC Commissioner Lin Kun-pao
both campaigned for President Chen prior to his March 2004
re-election (also prior to the establishment of the FSC).
However, Kong, Lu, and Lin are not DPP party members, but
have solid financial backgrounds. None of nine FSC
commissioners is a member of any political party. The FSC
has not been a significant target of opposition party
criticism. The most politically sensitive issue it deals
with is the Financial Reconstruction Fund (FRF) that
facilitates the sale of troubled financial institutions. The
FSC has sought additional funding for the FRF, but it has
been blocked by the opposition parties.

FSC Chairs the Joint Standing Committee
-------------- --------------


5. (SBU) The FSC functions as a consolidated financial
regulator over the banking, insurance, securities and futures
industries. Its nine commissioners represent the four
bureaus (banking, insurance, securities and futures, and
inspection) and five supporting departments (planning,
international affairs, legal affairs, information management,
and support) within the FSC. Decisions are made by a
majority vote of commissioners. Taiwan officials believed a
consolidated regulator was needed to respond to the challenge
of regulating multi-faceted financial holding companies and
the global trend of increasing cross-sector business among
banking, insurance, and securities and futures. The FSC
enjoys quasi-judicial powers in that it can supervise,
examine, conduct investigations, and impose fines or other
penalties. The FSC chairs the Joint Standing Committee
(JSC),which also includes representatives of the MOF,
Central Bank, Mainland Affairs Council (MAC),Council for
Economic Planning and Development, and other ministries on an
ad hoc basis.


6. (C) In remarks to an Amcham meeting on December 15
Chairman Kong noted that the JSC meets to discuss financial
and monetary policies that may go beyond the responsibility
of any single agency. Kong mentioned privatization of
state-owned enterprises (SOEs) as an example. Financial
sector SOEs with government ownership above 50 percent come
under the jurisdiction of the MOF. However, the FSC can
assist the privatization of those with less than 50 percent
government ownership. In both cases, the FSC is involved in
arranging underwriting for the issuance of equity shares.
Kong also mentioned that while the FSC has overall
responsibility for securities trading, the Central Bank has
authority over capital flows arising from trading in foreign
securities and foreign portfolio investor trading in Taiwan.

Cross-Strait FSC Issues
--------------


7. (C) Currency exchange between China's Renminbi (RMB) and
Taiwan's New Taiwan Dollar (NTD) is another issue requiring
interagency coordination between the FSC, Central Bank, and
MAC. The FSC oversees banking operations, while the Central
Bank is responsible for managing capital flows with foreign
currencies, and MAC has authority over cross-Strait issues.
A Central Bank official told AIT that in early August an
interagency meeting attended by Taiwan National Security
Council Secretary General Chiou I-jen, the Central Bank, FSC,
and MAC discussed a pilot project for legal exchange between
the NTD and RMB by banks on the Taiwan-controlled islands of
Kinmen and Matsu. However, according to our Central Bank
contact, the proposal has been blocked by the MAC and is
still sitting on the desk of the MAC Vice Chairman awaiting
his approval. During an early December trip to Kinmen, AIT
found that banks there were still unable to change currency
between RMB and NTD.

Taiwan's Strengths
--------------


8. (C) The FSC believes that Taiwan has potential as a
regional fund raising and asset management center. Chairman
Kong noted that companies from Singapore and Hong Kong
frequently come to Taiwan to raise capital. He pointed out
that Taiwan has a strong and globalized manufacturing base,
huge capital surplus and low external debts, well-trained
professionals, and a well-established financial system. He
also noted that the liquidity of Taiwan's stock market is
third largest in the world, its market capitalization is
first among emerging markets and third overall in Asia, and
the volume of Taiwan's bond market is also third in Asia.

New FSC Regulations
--------------


9. (C) Among new regulations, the FSC has abolished required
earnings forecasts for listed companies. The reason behind
this move was to prevent abuse and stock price manipulation
and to encourage portfolio investors to read and analyze
company financial statements rather than depending only on
earnings forecasts. Just as Taiwan has too many banks, it
also has too many insurance companies. The FSC is
encouraging them to merge into bigger, stronger insurance
companies that can play a more significant role in the
region. The FSC is currently rating insurance companies on
the quality of their management and financial standing and
will publish the names of companies receiving penalties. The
FSC has restricted the use of credit cards for paying debt in
order to get credit cards back on track as tools for
consumption instead of debt repayment.

Business Community Reaction
--------------


10. (C) AIT has heard complaints from foreign financial
firms about the difficulty of keeping up with the many new
requirements imposed by the FSC. Business people say they
were confused about who spoke for the FSC in the context of
contradictory statements from different FSC commissioners.
To address these problems, the FSC appointed a spokesperson
and made efforts to increase the transparency of its
decision-making procedures. Chairman Kong has delivered
powerpoint presentations and answered questions at a number
of gatherings of foreign businesspeople, including Amcham and
the European Chamber of Commerce in Taipei (ECCT). During
Chairman Kong's Amcham presentation, he answered wide-ranging
questions for about 45 minutes.
PAAL