Taiwan's tough line reflects trend: Cerulli

Moves by Taiwan to tighten rules on foreign fund houses reflect a trend for governments in Asia to seek to strengthen their local fund industries, says the research house.
Taiwan's tough line reflects trend: Cerulli

Foreign fund houses are finding it more challenging to compete for Asian assets as market dynamics become more complex and local regulators push for stronger commitment from offshore firms, said Cerulli Associates.

For firms with more ambitious goals, a substantial local presence is no longer optional, argued the research house.

A prime example of this trend is Taiwan, which is seeking to reverse years of allowing offshore funds easy access to the market by tightening the rules in favour of onshore players, noted Ng Sze Yoon, research director at Cerulli.

“The Taiwanese regulator wants offshore fund houses’ front-, middle- and back-office functions to be locally present as much as possible, and firms to manage the assets in the country,” she said.

China and Hong are also effectively pushing for foreign firms to build up teams on the ground, having proposed the Hong Kong-China mutual recognition scheme. This incentivises asset managers to set up Hong Kong-domiciled funds, as they would then be able to sell them into the mainland.

Given such moves, Ng said asset management firms should build strong local expertise and make use of joint ventures, partnerships and M&A, if they are to be successful in Asia.

To encourage the growth of the local industry, Taiwan has capped the number of offshore funds permitted to be submitted for approval at one time to one from three.

It has also implemented what is calls a 'commitment scorecard' to assess fund houses based on criteria including employment of locals, investments, tax and revenue contributions, and talent cultivation in Taiwan.  

Firms meeting the criteria can enjoy perks such as submitting more offshore funds for approval, quicker product approvals, and the ability to launch new types of product.

These moves got under way last year, but the criteria have been deemed tough, and few firms have qualified so far, noted Ng.

“Our sense is firms are trying to meet the criteria – for instance, by increasing local staff in sales or investment area – but it is not easy to qualify," she said. "We've heard of firms that qualify on the staffing criteria, but may not have sufficient assets in discretionary accounts.

"To be fair, many of these changes can't be made overnight, and it is likely we'll hear more examples of qualifying firms in the next 12 months since most firms are working towards it," she added.

Ng said regulators may allow some flexibility on the score card. “Some managers we spoke to earlier in the year commented that there is more flexibility in the system now for them to meet the criteria. We expect to see more conversations take place between the two stakeholders.”

Taiwan's Financial Supervisory Commission (FSC) is trying to complement the scorecard by boosting the competitiveness of local managers. Some of the initiatives include loosening product restrictions, such as allowing the launch of leveraged and inverse funds exchange-traded funds and allowing onshore balanced funds and onshore bond funds to invest in high-yield bonds.

The FSC is also helping other local sectors to develop besides mutual funds, such as by allowing local private funds to invest in gold and other commodities in July this year, Ng said. 

This is reflecting a trend elsewhere in Asia among both regulators and market participants, she added.

Many asset managers are recognising that what worked very well in the past is not working any more, noted Ng, with firms increasingly looking to tap a local partner's capabilities rather than going it alone.

And more foreign fund houses are increasing their local headcount, she said, with some entering distribution partnerships for as short a time as six months, sometimes on a specific product. Joint ventures had previously been the most common way to enter local markets.

Recent initiatives such as the renminbi qualified foreign institutional investor (RQFII) scheme have led to quite a number of tie-ups, added Ng, and the upcoming Asean passport scheme will trigger similar moves.

Asia represents a bright spot for the global fund management industry, said Cerulli, forecasting that Asian ex-Japan mutual fund assets will grow from $1.34 trillion at the end of 2013 to $2.27 trillion in 2018.

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