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Officials find 9 local banks in violation

TAIPEI, Taiwan -- Nine local banks were found to have violated the law in their practice of selling the financial product target redemption forward (TRF), according to the result of an investigation conducted by the Financial Supervisory Commission (FSC).

Due to an opportunity to levy higher transaction fees, in recent years local banks began selling the highly risky financial derivative TRF. Some banks have seen a surge in their TRF trading and profit growth. With growing customer complaints, the FSC launched an investigation into nine banks conducting the largest share of TRF business.

According to the FSC's findings, all nine of the banks violated the law to varying degrees. It is rarely the case that all parties being investigated by the FSC fall short of meeting regulatory standards. It appeared that there were serious breaches of law in TRF trading, and the FSC was invited to the Legislature yesterday to give a briefing on the issue.

Bank SinoPac Committed Gravest Violations

Of those banks, Bank SinoPac (永豐銀行) was banned from engaging in TRF business for one year. Compared to other financial institutions, SinoPac had a worse-than-expected performance in the first quarter. Its profits dipped and earnings after tax totaled NT$2.944 billion with an EPS of NT$0.36.

Institutional investors have adjusted Bank SinoPac's target price downward to NT$12 per share. Both Morgan Stanley and Goldman Sachs have advocated a "sell" of SinoPac's shares.

The other eight banks probed by the FSC were asked to provide explanations of the violations by letter. The FSC has asked them to put a hold on selling TRF not for hedging purposes until the end of May.

Following the administrative procedure, the FSC usually provides banks with a chance to explain themselves if any violations are found, FSC officials said. If banks' reasons are persuasive, the FSC may consider removing or levying lighter penalties. If not, the FSC will exert punishment according to the law.

Amendment to Regulations to Beef up Protection

Besides exacting penalties on banks, the FSC will ask the Bankers' Association to better regulate itself as well as tightening regulation covering the sales of financial derivatives. The FSC plans to roll out measures to enforce better financial product transactions by June. It is also considering making amendment to the Consumer Protection Law, in an effort to strengthening consumer protection.

For example, before banks start selling risky and highly complex financial products for the first time, they must be proposed to or approved by the board. Also, the Joint Credit Information Center will establish a customer database tracking their financial product transactions, as part of the efforts to strengthen risk control.

In addition, the FSC says contracts that govern risky financial products should stipulate a stop-loss point mechanism to prevent customers from suffering substantial losses.

When asked if there will also be restraint on parties that may be allowed to purchase derivative products, FSC officials said in response, with the stop-loss point mechanism in place, risk involving the trading of derivative products will be greatly reduced. As such, whether it is necessary to place limit on who may purchase financial products merits more deliberation.

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