The Executive Yuan finalized a draft of the Financial Holding Company Law (
The Legislative Yuan is expected to start reviewing the draft this week. The draft could be passed during the current session.
Minister of Finance Yen Ching-chang (
More than 20 domestic financial groups -- including Fubon Group (
Framework for integration
The main purpose of the draft is to provide a legal framework for financial groups that want to integrate their financial service subsidiaries, such as banking, insurance and securities, through a financial holding company. The framework will allow local firms to develop more internationalized services.
Although the legal framework of finance service industries differ among nations -- such as the universal banking system in Germany and the UK and the holding company system in the US -- many have recently moved toward the formation of a financial holding company system, finance ministry officials said.
New US rules
In 1999, the US passed the Gramm-Leach-Bliley Act, abolishing the segregation of banking and securities services as stipulated in the 1933 Glass-Steagall Act. The new law permits financial holding companies in the US to simultaneously provide financial services, such as securities, insurance, investment consulting, mutual funds and merchant banking.
Japan also made legal changes when it abolished its restrictions on setting up holding companies with its Anti-Monopoly Law in 1997.
Following changes in the US and Japan, Taiwan also must adjust its rules in an effort to become internationally competitive, Taiwan officials said. The first major step on this path came when the legislature passed the Financial Institutions Merger Law (金融機構合併法) on Nov. 24, aiming to encourage financial institutions with similar services to merge.
Officials said the next step will be to diversify the scope of financial services through the establishment of the financial holding company. Such a move will allow the financial system to begin focusing on shareholding concentration, bigger organization structure, diversification of services, and improved operating transparency.
According to the draft, to establish a financial holding company the applicant and his affiliates must control a 25 percent of stake in a bank, insurance company or a securities company, or to control more than half of the seats on the entity's board of directors. The 25 percent stake is the current ceiling for an institution and its affiliates in controlling a domestic bank as stipulated by the Banking Law. There is no similar limitation for insurance or securities companies.
Required diversification
The company must also diversify into other financial services before being eligible to apply. The applicant must be involved in at least two of the three financial services -- banking, insurance and securities -- before being eligible to apply.
In addition, the company has to achieve a certain asset level. Local reports have said the minimum requirement of a financial groups' assets may be set at NT$100 billion. Officials, nevertheless, have said the requirement has yet to be determined.
The US government has set the minimum requirement at US$50 billion.
Any firm that meets the requirements has to submit its application on setting up the financial holding company within 12 months after the law has been promulgated, according to the draft, but adjustment periods for domestic financial groups have been included in the draft.
Adjustment period
Any firm that does not receive approval in the first year will be given five years to make the needed adjustments. If there is legitimate reason and granted by the authority, the adjustment period could be extended twice more, with each period being two years.
If a foreign entity already has set up a financial holding company abroad and is considered well capitalized and well managed, the entity would not be required to set up another financial holding company in Taiwan. Qualified foreign financial groups would be given national treatment to conduct various financial services in Taiwan ahead of the country's entry into the WTO.
One of the most important aspects of the draft is that joint-marketing would be allowed for any financial holding company, given that customers' interests are not damaged or compromised. In other words, a financial holding company could sell its financial products to customers at any of its subsidiaries.
Cross-holdings of shares
The draft, however, bans cross-holdings of shares between a financial holding company and its subsidiaries. Any subsidiary of a financial holding company is forbidden to hold shares of its parent company, which would be the financial holding company.
The draft provides a three-year adjustment period for the problem of share cross-holdings to be resolved before becoming a financial holding company.
In order to prevent a conflict of interest between a financial holding company and its subsidiaries, the draft also bans the bank subsidiary and/or insurance subsidiary of a financial holding company to provide loans without collateral to a firm, whose major shareholders or directors are the same shareholders or directors of the said financial holding company.
The draft also provides stiff penalties for anyone who violates financial holding company regulations, with a maximum of three to 10 years in prison and fines of up to NT$100 million.
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