The Financial Supervisory Commission Hangs Out Its Shingle--A New Page in Financial Oversight
Laura Li / tr. by Anthony W. Sariti
August 2004
After a year of planning, the Execu-tive Yuan's Financial Supervisory Commission (FSC) formally came into being on July 1. The main aim in creating the commission is to establish "unified financial supervision" by centralizing and strengthening the financial inspection and investigation powers previously divided among the Ministry of Finance (Bureau of Monetary Affairs, Securities and Futures Commission and Department of Insurance), the Central Deposit Insurance Corporation and the Central Bank of China, all for the purpose of maintaining Taiwan's financial stability and promoting the future development of its financial markets.
In mid-June, two weeks before the establishment of the FSC, Taiwan's own "Enron" case exploded on the scene. Procomp Informatics, once known as the "king of stocks," was looted by its chairwoman, leading to substantial deficits. When the company was delisted from the stock market, tens of thousands of small stockholders instantly suffered tragic losses. The market has not yet recovered from the shock. How to restore market order is the task currently putting the FSC's abilities to the test.
"Men run on two legs, but money runs on four." With the aid of information technology, the manipilation of business finances and the complexity and variety of financial derivative products are developing at an alarming rate. On the other hand, since the overnight collapse of Britain's old line Barings Bank in 1996 to the crisis in the US in 2001 brought on by Enron's fixing the books and going bankrupt, ways of breaking financial laws have becoming increasingly sophisticated and hard to detect. The scale of losses is also increasing alarmingly. How to prevent and stop cases of financial wrongdoing has become a pressing matter for every country.
As for Taiwan, after the Financial Holding Company Act was passed in 2001, banks, securities companies and insurance companies, which previously had to operate independently, could now be incorporated into a single financial group. In a few short years 14 financial holding companies were set up. These "financial monsters" can certainly rely on the synergy of large scale and cross-financial industry operations to be more competitive worldwide. But an enterprise that's like an octopus with intertwining tentacles everywhere can of course easily hide its evil ways. It must be overseen by a more professional, more authoritative financial organization with special regulatory responsibilities that can operate on a higher moral plane. In light of this, the FSC, born in the wake of widespread calls for its establishment, immediately became the object of great expectations.
According to the Organic Law of the Financial Supervisory Commission, there are four bureaus under the Commission: Monetary Affairs, Securities and Futures, Insurance, and Financial Examination, which has quasi-judicial powers. The commission has an overall personnel level of some 900 people.
Although still in its early stages, the FSC, under the leadership of its first chairman Kong Jaw-sheng, has already exhibited an iron-fisted approach intent on reform. The first example is the Procomp case, involving intricate and complicated capital flows. After two weeks of investigation, preliminary findings have been made public. In addition, four accountants who had contracts to audit Procomp were severely punished with a two-year suspension of business. Because the accountants were from two major domestic accounting firms, this action was a serious warning for the accounting industry and embodied the hope that the age-old abuses of purposeful undervaluation, placing too much trust in the client and not pro-actively verifying accounts could be rooted out.
In addition, the Procomp case showed that Taiwan's policies on corporate governance have not had the desired effect. In the future there must be improvements to include a strengthening of the role of independent directors and supervisors (to introduce disinterested, impartial outsiders into companies' boards of directors), the establishment of a new early warning system, and the strengthening of supervision over international financial operations. At the same time the FSC will require the Securities and Futures Investors Protection Center, which was set up with government support, to fulfill its role by seeking compensation for investors who have been hurt, so that crooked businessmen who want to spirit away the contents of the company's coffers will not only face jail time but also bear the burden of huge payments arising from civil damages cases, thus strengthening deterrence.
In addition to strengthening control measures to root out corruption and malpractice, the FSC is currently drafting a number of policies aimed at rebuilding domestic financial health, including an "exit mechanism" for banks and insurance companies that will allow businesses in economic difficulty to engage in stock transfers, mergers, etc., without affecting the rights of customers. Looking at the future and the "promoting benefit" side of the equation, does Taiwan still have a chance of becoming an Asia-Pacific financial center? How can Taiwan investors in mainland China be wooed back to the Taiwan market? This all requires planning.
The establishment and functioning of the Financial Supervisory Commission is key to the success of Taiwan's financial reforms and its international competitiveness. The results of its efforts should concern us, and we should look forward to them.
