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Serious financial oversight needed

In the two years and four months since the Financial Supervisory Commission (FSC) was established, it has been plagued by a lack of careful planning and a succession of scandals involving high-ranking members.

Its reputation was damaged again last week by the detention and investigation of commission member Lin Chung-cheng (林忠正) on suspicion of corruption on Monday. Now the public is once again closely watching to see what the future of the organization will be.

The founding of the commission was set against the backdrop of the Asian financial crisis during which the hardest-hit countries, such as South Korea and Thailand, gave themselves economic makeovers by undertaking broad financial reforms with assistance from the IMF.

Following Japan's financial reforms in 1998, there was a broad resurgence in Asian financial markets. South Korea and Thailand structured their reforms around the model of the UK's Financial Services Authority by consolidating the management of the banking, insurance, securities and related industries under a single body.

Most countries in the EU are moving toward a model similar to that of the British. The US is also working on legislation to streamline its current financial regulatory system, preceded by the Financial Services Modernization Act passed in 1999, which facilitated more financial market integration.

The integration of financial services across different sectors has already become commonplace in international financial markets, and multinational financial institutions have become widespread. Organizations such as the Bank for International Settlements and the IMF have even begun admonishing various countries to take steps to manage their financial markets more efficiently.

Taiwan's financial industry was also affected in 1998 when the total of bad loans accumulated by banks almost equaled the net worth of the entire sector. The insurance industry was also taking major losses. With the repeated tumbling of the Taiwanese stock market, the securities industry began consolidating.

The passage of the Financial Holding Company Act (金控法) rendered powerless the old financial regulatory systems, and the appearance of cross-industry financial services and the rapid conglomeration of the financial markets was meant to ensure that the old disparate financial laws would no longer operate effectively.

The founding of the FSC was originally an opportunity to create a whole new financial environment for Taiwan. It could have been built on a more open and transparent foundation to do away with all of the age-old malpractices and enable the financial system to be internationally competitive.

But up to this point, it has completely failed to meet expectations. First and foremost, it has employed the wrong kind of people. The upper-level managers have not had the necessary executive experience, professional abilities, moral character, or integrity. The commission members simply reiterate their own opinion when a consensus can't be reached, creating chaos.

This is the reason for the debate about bringing the commission's authority to set policy back to the Ministry of Finance. The Financial Examination Bureau under the FSC should be focused on auditing accounts, but it has had to spend its time finding prosecutors for scandals. The controversies surrounding whether its heads should stay or go have entangled what should be an independent body. Meanwhile, official duties are not distributed appropriately among members, work loads vary and problems have multiplied.

The original idea was that the commission would have at least two members each from the banking, insurance and securities industries, while the other three members could be chosen based on their legal background or experience in a field related to finance. In contrast to the practice during the Chinese Nationalist Party's (KMT) time in power, there would be a balanced distribution of academics, industry professionals and government officials.

But if one looks at the current makeup of the commission's members, there is one member from the insurance industry and many with backgrounds in securities, law or non-financial industries, but no banking professionals. This is one of the veiled reasons Taiwan hasn't been able to create an effective management strategy to resolve its banking problems.

The commission's founding should have emphasized the need for a comprehensive planning office and a legal affairs office to facilitate the consolidation of financial regulations. The group of unqualified place-holders that form the commission today don't have the ability to implement these functions.

Last week was the 20th anniversary of the large-scale financial market deregulations in Britain, which symbolized a milestone in the world's movement toward financial liberalization. The rest of the world has followed the UK's reformist trend.

The establishment of the commission was intended to be Taiwan's most important financial reform and give it a place among the other reforms happening in Asia. But because the members were chosen without serious consideration of their moral character or professional talent, and were instead carelessly appointed for political reasons, the commission has become an international laughingstock.

Those in power should take action and overhaul the commission's personnel without any thought to cost or political affiliation. They should choose members purely on their professional merits and establish a new commission capable of fulfilling the duties it was created for. This is the only way to give Taiwan's financial markets a chance to succeed.

Norman Yin is a professor of financial studies at National Chengchi University.

Translated by Marc Langer
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