There is evidence to suggest the fall of Lehman Brothers five years ago last weekend and ensuing regulatory tightening has been good for Taiwan’s mutual funds industry.
But this is not a view universally shared by onshore players, some of whom argue that the rules imposed post-crisis are cumbersome, slow product sales and dent returns.
Lehman’s bankruptcy in September 2008 had a serious impact on Taiwan’s financial market. Some NT$80 billion ($2.7 billion) was tied up in structured notes linked to the US investment bank by retail and institutional investors, with total losses estimated at NT$40 billion.
The crash exposed the lack of any legal protection for consumers at that time and led to protests in the streets.
Taiwanese authorities responded by introducing the Financial Consumer Protection Act in December 2011, requiring fund houses to carry out training with distributors, and also understand their clients' risk profiles. This involves detailed reviews to ensure they understand the products they are selling, as well as their clients' risk appetite.
Should any disputes arise from the sale of investment products, an arbitration centre has been established in Taipei to deal with cases below an NT$1 million threshold.
Onshore sales agents now must first evaluate a client’s risk profile and appetite before selling them an investment product, which are now categorised into five risk buckets. This process is commonly referred to as know your customer (KYC) and know your product (KYP).
However, Donna Chen, managing director at Keystone Intelligence, argues this limits the product types that fund firms can offer, ultimately dampening investor returns. The process also slows the point of sale, which can act as a deterrent in some cases.
“For investors who are classified as conservative, they may want some return but banks simply can’t sell them risky products, meaning they cannot time the market,” Chen observes.
Having had their fingers burned, Taiwanese retail investors remain wary of offshore structured notes. Assets in these instruments have sunk to NT370 billion as at June 30 this year, less than half the NT$794 billion at the end of 2008, finds Keystone Intelligence.
However, what is noticeable is that sentiment towards offshore products including mutual funds – which are generally well structured, easier to understand and less risky – has improved over the same time frame.
Keystone notes that there was NT$2.89 trillion in assets held in offshore products as at the end of June this year, a 4.7% rise on the end of 2008 (NT$2.76 trillion).
“Confidence in investment products has been restored, although investors are more conservative than before and are showing a preference for mutual funds and insurance products,” observes Chen.
Henry Lin, president of Fubon Asset Management who also serves as chairman of Taiwan’s Securities Investment Trust Consulting Association (Sitca), acknowledges industry frustration about the time it takes to sell funds and additional due diligence complexities.
But he is firmly of the view that these regulations are in the long-term interests of the industry and of retail investors, arguing that they should not be watered down further no matter how time consuming the process has become.
“Relaxing the regulations will just increase the risk [associated with mis-selling],” he says, adding that fund houses will feel the benefits of the changes in line with improvements in investor confidence.