The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is the world’s most important regional economic integration agreement, to which Taiwan has finally submitted its application for membership. CPTPP members account for over 24% of its total international trade, but to join the agreement, countries must accept a high degree of liberalization. If competition is fully opened up, it is not only the manufacturing industry who must prepare, but also finance.

An opportunity for industrial upgrade

The Taiwan Banker magazine invited Huang Tien-mu, Chairman of the Financial Supervisory Commission (FSC), to talk about how Taiwan’s financial industry can prepare for its possible future ascension. These preparations will include the Banking Law, Securities Trading Law, and Insurance Law; the scale of the capital market would also be expanded to build a sound trading market. Taiwan would also strengthen its money laundering controls, loosen regulations, strengthen the competitiveness of its financial industry, and promote ESG practices. The CPTPP would be Taiwan’s most important stepping stone on its way to the international arena, and also a great opportunity for financial upgrade and transformation. The FSC has previously brought the financial industry into line with international standards. After this adjustment over the past few years, Taiwan is now ready to face international competition.

Regarding the problems or opportunities the financial sectors of CPTPP member countries have encountered after joining, Huang mentioned that Chapter 11 of the CPTPP, Financial Services, includes a total of 22 provisions and 5 appendices. Annex 3 of the CPTPP is a negative list for the financial service industry. If any member state has regulations or measures that do not comply with the CPTPP, including violations of national treatment or most-favored-nation treatment, they must be listed in Annex 3 to be excluded, otherwise they must give investors and financial institutions from other member states the same treatment.

It is understood that Japan will exclude foreign bank branches from its deposit insurance system, Australia will restrict foreign bank branches to first deposit amounts on individual accounts of not less than A$ 250,000, Singapore will require banks established in its territory to have directors who are Singapore citizens or permanent residents, and Chile will require that the representatives of financial institutions be Chilean citizens or foreigners with permanent residency. Thus, when countries join the CPTPP, either due to different levels of industry development, or to considerations such as domestic institutional relations, they face different difficulties and restrictions during liberalization, which can be observed from their negative lists.

Looking at the negative list and cross-border trade commitments submitted by existing member states, the financial market opening commitments of most CPTPP countries are more advanced than those to the World Trade Organization (WTO), and are close to or do not exceed the current situation. For example, in the WTO, Brunei did not promise to allow foreign banks to establish bases. After negotiation, it made commitments in accordance with current regulations. Vietnam’s commitment is the same as it made to during WTO accession. Australia has further opened up the asset threshold for acquisitions of local companies. Peru abolished its rule that 80% of employees must be locals and 70% of salaries be paid to Peruvian employees, and opened up cross-border reinsurance services. Banks looking to expand can refer to countries’ specific commitments to open cross-border trade and retention measures (negative lists) in the relevant target markets as reference.

Relevant international competition experience

In addition to the clear commitments for market opening, CPTPP also enhances the transparency of financial regulations, and establishes relevant regulatory reviews, responses, and applications, contributing to the transparency and predictability of market opening. The financial regulations of CPTPP also provide for consultation, dispute settlement, and investment dispute arbitration, which are helpful for dispute resolution.

Huang said that most Taiwanese banks follow Taiwanese businesses to go overseas. He expects that the CPTPP will increase bilateral trade and investment. Local Taiwanese businesses will demand financial services such as financing, lending, export financing and insurance. He hopes that the growth will help Taiwan’s financial industry grow in those markets.

The regulatory transparency requirements of CPTPP are high. Regarding any aspects of Taiwan's financial regulations that need to be strengthened, Huang said that financial markets substantially opened up when Taiwan joined the WTO in 2002. Foreign financial companies have been granted national treatment. For example, in the banking industry, foreign banks can apply to establish operating bases in the form of branches or subsidiaries. They receive full business licenses, which includes all services regulated by the Banking Law; foreign insurers can establish organizations including branches, subsidiaries, joint ventures, and offices. Therefore, Taiwan’s financial industry already has relevant experience in international competition, and joining the CPTPP will not seriously impact it.

Prudent supervision measures

In recent years, the FSC has continued to internationalize and liberalize its financial markets, with voluntary liberalization measures to open up certain cross-border services. For example, it revised the Systems and Procedures for Outsourcing of Internal Operations by Financial Institutions, allowing cross-border outsourcing of information processing operations for consumer business by domestic banks, and bank securities brokers to serve as agents for purchase and sale of foreign bonds. In addition, domestic banks and branches of foreign banks in Taiwan have been allowed to provide information and consulting services related to overseas derivatives for domestic institutional investors and foreign financial institutions.

Regarding the transparency of financial regulations, Taiwan will follow its administrative procedures to implement regulatory notices, and give the public opportunities to comment. The application procedure requires openness and transparency. In conjunction with Taiwan’s application to join the CPTPP, the FSC will consider the degree of openness in other countries, and take into account the needs of its financial industry and overall interests to adjust its negotiating strategy for maximum benefit. At the same time, Taiwan will continue to uphold the operations of its financial institutions, protect consumer rights and interests, maintain financial stability, and implement prudential supervision measures.

After joining CPTPP, greater financial liberalization will be inevitable. Service providers from member states will provide new financial services in CPTPP markets, as long as companies in that market are approved for those services. For Taiwan’s financial market, competition may become more intense. In this regard, Huang said that after the accession to the WTO, foreign financial companies were granted national treatment. Financial products and services from foreign institutions promoted the diversification of Taiwan’s economy. A highly competitive market would also help Taiwan’s financial industry to grow its assets and adapt to the international environment.

In principle, the CPTPP allows cross-border provision of services, and member states should adopt a positive list method for cross-border trade, setting out the cross-border financial services that can be provided by other member states. After reviewing the lists submitted by each member, the financial services that each member country allows for cross-border provision are still limited.

In “banking and other financial services,” for example, most countries only promise cross-border “software for provision and transfer of financial information and financial data processing, etc.” and “financial service advisory, intermediary and other auxiliary financial services.”

Strengthening and consolidating the financial security protection system

Fintech is changing rapidly, and new financial service models provided online are gradually gaining consumer acceptance. The FSC has proposed a roadmap for fintech development in order to quickly improve the competitiveness of Taiwan's financial industry, and has approved several virtual banks. Banks can consider cross-border services to find overseas business opportunities while complying with both domestic and foreign laws and regulations.

Growth in cross-border new financial services may increase supervision risks, and the FSC has made preparations accordingly. According to CPTPP regulations, countries can still require cross-border service providers to register or obtain advance approval from the regulator of the host country. The FSC will cooperate with other member states to ensure the rights and interests of Taiwanese consumers and maintain the integrity of the financial system. In addition, the FSC has also formulated a plan to strengthen and consolidate financial security protections.

Following relevant principles set by international organizations for financial supervision, such as the Core Principles for Effective Banking Supervision set by the Basel Committee on Banking Supervision (BCBS) of the Bank for International Settlements (BIS) concerning M&A supervision and the relationship between the home and host country, the FSC has strengthened cooperation with other regulators. The FSC is also a member of international organizations such as the International Organization of Securities Commissions (IOSCO) and International Association of Insurance Supervisors (IAIS), and has actively strengthened bilateral supervision cooperation with other financial authorities, while taking into account the latest international regulations and best practices, in order to promote integration with international standards.

The CPTPP will open up highly liberalized competition. Taiwan's financial industry must be prepared! Competition is bound to become stronger, therefore, the industry must improve its competitiveness as soon as possible.