A battle royale has broken out in Taiwan between Fidelity Investments and the more established mutual fund companies that will determine the course of mutual fund distribution to Taiwan's huge retail market. Fidelity says local players are using their leverage with regulators to bury its plans to introduce a more competitive and fair playing field. Rival fund managers say Fidelity is playing fast and loose with regulatory loopholes, and deserves to be thwarted by the Securities and Futures Commission (SFC).
But this is also a fight between two cultures. Fidelity, which is the second biggest provider of offshore funds in Taiwan, is trying to revolutionize the business by importing a successful American model. Representing the old guard is JF Asset Management, now an arm of JPMorgan Chase, which is the top seller of offshore funds. It is both a pioneer in Taiwan's funds industry and an established player with good relationships with regulatory authorities.
Throughout Asia, including Japan, it is rare for a fund company, domestic or foreign, to sell the same product through different banks or brokers. Distribution tends to be exclusive, creating fiefdoms that are not always competitive. In the United States, however, the mutual funds industry has long had 'open architecture', where such arrangements are broken up, and where fund companies' brokerage arms are willing to sell competitors' products in the interest of growing the overall market.
Fidelity helped introduce this open approach in America, where it has established an internet-based platform allowing any bank to access not only Fido funds but its competitors' for free. Fidelity gets a cut from the rival fund company if its product is sold via Fidelity's platform, but to the bank and its customers, there is no price advantage for any particular item. Customers get access to a far greater pool of investment products, costs go down and an easier process makes investing in mutual funds more accessible.
This strategy's success prompted Fidelity to expand it to the United Kingdom, where it has also been a hit, and now to Germany and Taiwan. Taiwan is appealing because of its massive domestic retail market for mutual funds. But its regulatory structure is very different: the law does not often make clear what is allowed, and what is not. Aggressive players rely on loopholes and grey areas to introduce new products and services, and employ crafty lawyers to interpret the law in their favour.
To get its way, Fidelity has had to rely on such a loophole. About 10 years ago, the SFC recognized a mutual fund as a security if it was listed on an acceptable exchange. This meant a licensed broker in Taiwan could sell international funds on such an exchange locally.
Indeed, Merrill Lynch has used this rule to sell all sorts of offshore mutual funds that are not registered with the SFC to private bank customers in Taiwan, in a protean form of open architecture.
But Fidelity, which has recently obtained a broker license in Taiwan, intends to sell its full range of Luxembourg-listed mutual funds û as well as those of other mutual fund providers, including Schroder Investment Management and Goldman Sachs Asset Management û to Taiwan's retail market.
"Taiwanese banks are not geared for the administration of selling mutual funds," says Brett Goodin, Fidelity's managing director in Hong Kong. "By creating a funds network platform we can grow the pie, reduce costs to investors and raise industry standards."
But while Fidelity says any mutual fund company can place its funds on the platform, this is a novel idea in Asia and has been met with hostility by local players. Although Goodin would not name anyone, he says, "Local competitors have been unethical. They have gone to the regulators and the banks and badmouthed the concept. Instead of getting on board, they're trying to bring it down."
Other fund companies say JF Asset Management is behind the attacks. A JF executive denies the firm has used its guanxi û relationships û with regulators to make them frown on the project. But the firm has stated its view that Fidelity's strategy is flawed and unlikely to go forward, he says.
Put it this way. Fidelity is encouraging fund companies to get listed in Luxembourg, which is recognized by Taiwan but has very relaxed regulation. It can be seen as a bit of a sham because the funds hardly ever trade on the exchange, they are there only to be equated with securities. Many of these funds are hedge funds with heavy use of derivatives, or are very young, both of which circumvent SFC requirements that to be registered, an offshore fund must have a track record and little derivatives exposure.
The Fido approach, in other words, would explode the existing regulatory regime, which is extremely controlling and conservative, and allow Taiwan retail investors access to all kinds of products. The SFC viewed the Fidelity plan as dangerous because once retail investors started losing money on some of these products, they might complain and start causing major headaches.
Whether due to JF and others objections, or to its independent judgement, the SFC has steadily been adding new rules that appear designed specifically to stymie Fidelity.
Goodin asserts, "Every month the SFC throws up a new barrier. It's a frankly disturbing reaction and over the past 12 to 24 months I have seen a backwards movement in the development of the market."
The latest: this past Thursday, the SFC's Division 2, which monitors brokers, declared any mutual fund sold via a broker must be approved by it. Already any offshore funds sold through Securities Investment Consulting Enterprise (Sice) licenses, which is the way all offshore funds are introduced now, must be registered with Division 4, which regulates fund managers.
From Fidelity's point of view, this is a blatant attempt by local cronies to stop it from adopting a funds distribution platform. To others, however, it is a prudent move by the SFC to maintain its overall regulatory regime and protect investors from exposure to all kinds of unknown, risky products.
The one thing that everyone agrees on is that open architecture is the wave of the future in Taiwan over the next three to five years. Not only does it give distributors access to more products, but a system such as Fidelity's can also help educate them and their clients; tailor risk profiles and help clients select funds; and let banks handle reconciling statements, reporting and trade confirmation for multiple fund houses at one spot.
In fact, rivals say JF is now putting together a fund distribution platform of its own, one likely to only include SFC-registered funds. The JF official says the idea is being considered but declined to comment on it.
But Fidelity is probably going to be forced to change tactics, and at least for now limit the fund supermarket to only those funds already registered with the SFC. The Luxembourg loophole using a broker license isn't going to work for now.
Says a third fund manager hoping to get on such a platform: "Markets such as Taiwan are keen to replicate global standards, but they don't always fully appreciate the meaning of regulations in places like the US. It took the West many years for these structures to evolve. I think Taiwan will have open architecture in the next five years, but whether it will let Fidelity source funds as a broker, I just don't know."