On 26 November 2014, the Taiwan Financial Supervisory Commission (FSC) announced that, effective from 1 January 2016, the percentage of assets under management (AUM) of offshore funds registered for sale in Taiwan sourced from Taiwan will be limited to 50% of total fund AUM (the current limit is 70%).
Because many popular Taiwan registered offshore funds have Taiwan sourced investments in excess of 50%, the action will likely force offshore fund managers to suspend (or at least discourage) new subscriptions in such popular funds for some period during the one year grace period so as to meet the 50% limit by the end of 2015.
The action is only the most recent of several actions taken by the FSC over the past two to three years to promote the development of substantive onshore fund management activities by addressing what the FSC perceives as (i) unfair advantages previously given to offshore funds over Taiwan domiciled funds and (ii) an imbalance between the benefits derived by offshore fund managers from Taiwan and the contributions made by such managers to the Taiwan market.
The apparent FSC intent is to encourage (force) offshore fund managers to expand their onshore activities beyond pure distribution to include actual fund (and/or segregated account) management, operations and other aspects of the fund business by (i) making the cross border business more expensive and less competitive to operate vis-à-vis domestic funds (e.g. by limiting registrations and expanding staffing and infrastructure requirements for cross border distributors), (ii) creating competitive advantages for Taiwan domiciled funds and (iii) providing specific incentives to offshore fund houses while establish onshore asset management businesses or otherwise provide substantive contributions to the Taiwan market.
The actions which, in addition to the above, have been taken in recent years include, among others,
- reducing the number of funds permitted to be included in any one registration application from three to one;
- requiring master distributors (master agents) to meet minimum staffing requirements for sales channel management linked to size of AUM and to carry out know your product procedures;
- limiting the types of offshore funds that may be registered in Taiwan to equity funds, fixed income funds, balanced funds and money market funds and imposing criteria that funds falling under each fund type must meet;
- placing limits, and imposing disclaimer requirements, on the most popular offshore funds such as high yield bond and emerging market funds and funds which distribute regular dividends;
- removing the limit on the percentage of holdings by Taiwan domiciled funds in Mainland China securities but continuing to cap such investments for Taiwan registered offshore funds at 10% of fund AUM; and
- putting in place an "incentive plan" under which fund houses which make specific contributions to Taiwan are given registration related benefits not available to others.
The cumulative effect of the above and other like actions has been to significantly reduce the number of new offshore fund registrations and discourage new market entrants.
It is expected that pressures and incentives will continue to be implemented until the FSC feels as though it has achieved its goal of bringing more "substantive" asset management activities onshore.
The market has clearly taken note of the FSC actions and, in some cases, not so subtle FSC pressures. A meaningful number of offshore managers have already acquired Taiwan asset managers.