Taiwan regulators in tight spot on structured products

Dealers and distributors are crying foul of new product approval processes in Asia. While regulators in Taiwan are not alone in receiving criticism for imposing tough new rules for structured products, Taipei is drawing extra fire for its apparent inconsistency when it comes to vetting structured products.

Taiwan's Ministry of Finance and its integrated regulator, the Financial Supervisory Commission, are keen to ensure best practice levels of consumer and investor protection are in force on the island - something that has not always been the case during the past few years. The supervisors want to make sure Taiwanese citizens are fully aware of the risks they face when making financial decisions and, in some cases, prevent market participants from voluntarily investing in certain types of instruments deemed too hazardous by the regulators.

Taiwan is also keen to lose its label as a ‘test lab' for structured product innovation. Its laissez-faire approach to structured products approvals prior to 2008 allowed the market to reach nearly $30 billion in size. But failures in self-regulation, alongside a lack of appreciation of counterparty credit risks associated with capital guarantees, caused severe losses for the island's investors during the global financial crisis.

With this in mind, the authorities in 2009 introduced a slew of new rules aimed at tightening up market discipline. Most notably regulators ostensibly delegated product approvals powers to private sector industry associations, namely the Life Insurance Association (LIA), the Trust Association of ROC (Taroc) and the Taiwan Securities Association, which together represent the interests of the largest distributors in the country.

Manufacturers and distributors grumbled about the extra costs and red-tape linked with the news rules for issuing structured products in Taiwan. But these objections diminished as the market reopened in March last year. The LIA has to-date, received around 50 product applications and approved more than half of them, according to an LIA official.

Now, however, the structured products business has frozen again. Spooked lawmakers and regulators have reined in the LIA. They point out that the Taroc, which represents the interests of the country's trust banks, has received less than six applications and only approved one deal. The concern is clear: why is the LIA approving so many deals compared with Taroc?

The anxiety of supervisors is valid. But their approach to deal with the matter appears flawed. There is now pressure on the trade bodies to deny approvals for products that were previously acceptable. This appears to break a crucial tenet for prudential supervision - to provide clear and consistent rules.

The authorities may have calculated they have sufficient distance from the product approval process - which is meant to be up to the trade bodies - to not be accused of double-standards. But it appears that for the structured products markets in Taiwan, two cornerstones of effective regulation - investor protection and a level-playing field - are at odds with one another.