Taiwan fines BNPP and Deutsche for unlicensed derivatives sales

Six months earlier Barclays was given a 12-month ban for the same offence

BNP Paribas and Deutsche Bank were fined by Taiwan's Financial Supervisory Commission (FSC) in June for marketing derivatives onshore without a licence, the latest signal that the regulator is tightening oversight of global banks' activities in the country, following a 12-month ban imposed last year on Barclays for a similar offence.

The onshore marketing of overseas financial products by non-local employees is prohibited in Taiwan, however market participants say for years it has been common practice for global banks to use their Hong Kong-based salespeople to sell these products onshore in Taiwan.

In December last year Barclays became the first foreign bank to be censured for the practice when it was fined 12 million Taiwan dollars ($380,100) in addition to the ban from the onshore market.

Last month the regulator turned its attention to BNP Paribas and Deutsche Bank fining them the modest sum of two million Taiwan dollars for using their overseas-based employees to promote derivatives sales to Taiwanese clients, according to FSC documents.

"Regulators are fully aware of what foreign banks are doing in Taiwan but for years they just turned a blind eye to it as these activities did no harm to overall financial stability," says Andrew Fuh, Taipei-based partner at consultancy EY.

But the regulatory climate seems to be changing with an FSC official telling Risk.net they will continue to look to penalise global banks operating in Taiwan without the correct licenses. "The inspection will cover all market participants but the focus will be on banks that have relatively large business size in Taiwan and on high risk complex derivatives," says the official.

Taiwan's regulator has taken steps in the last 12 months to boost the domestic financial sector, for example by relaxing restrictions on trading foreign derivatives onshore last September. While previously all offshore-issued derivatives sales were banned, banks are now permitted to sell and trade these products onshore through locally hired people.

 

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"The reason why these banks were punished is they were promoting these products through overseas-based sales, not local employees," says the FSC official.

The FSC official adds that both Deutsche Bank and BNP Paribas secured a licence to trade offshore securities onshore earlier this year. One of the criteria to get the licence is to hire at least three people for the Taiwan office.

"The banks are moving quite slowly in hiring local people as they are doing quite well through the current business model. They didn't expect they would be punished for this," says Fuh.

Barclays got a tougher treatment than BNPP and Deutsche because of the greater sales volumes involved and is banned from applying for the onshore trading licence for one year. The FSC also urged the British bank to trace the accountability of senior executives involved.

Shortly after the crackdown Barclays' Taiwan country head, Cosmas Lu, stepped down to be succeeded by James Lin.

EY's Fuh suggests that the root cause of the three banks' problems may be related to issues with investors.

"The real reason why these banks got fined is because some investors reported them to the FSC after they suffered big losses from trading derivatives with them. These clients deem the banks intentionally misled them for buying products unsuitable for them, but the banks insisted they have done nothing wrong.

"These things happen all the time but for some reason much more frequently this year. It's not clear if foreign banks did mislead investors but banks did do something wrong from the very beginning – using offshore people to sell products onshore. That makes a reasonable ground for the FSC to punish them."

However, Fuh adds that regulators may just use this to warn others and will not penalise more foreign banks if the buy and sell sides could jointly improve pre-trade communication and specify their own obligations and rights. "Foreign banks should act more prudently on selecting their clients in Taiwan," he says.

Spokespeople for BNP Paribas and Deutsche Bank say they have strengthened their internal controls to ensure such issues do not happen in future.

Barclays declined to comment.

According to the head of derivatives at a Taiwan bank there has already been a significant shift in the onshore derivatives market away from international banks and towards local players.

"More local houses are building up their risk warehousing capability and foreign banks' market share has dropped a lot. There is a clear sign from the regulators that they want to increase local players' competitiveness in this sector."