FTC DRAFTS RULES FOR FI-NANCIAL HOLDING COMPANY MERGERS

11/01/2001

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After the Financial Holding Company Law (FHCL) came into force on 1 November 2001, Taiwan's financial services industry will ex-perience a trend toward greater concentration of shareholdings, increased size of financial insti-tutions, and greater diversity of operations. But the establishment of a financial holding company is also a business combination as defined under Article 6 of the Fair Trade Law (FTL), and as such requires the authorization of the Fair Trade Commission (FTC). In view of this, the FTC promulgated on 1 November 2001 the Rules for the Review of Business Combination Cases In-volving Financial Holding Companies. The rules aim to maintain the orderly conduct of trade and ensure fair competition in the financial ser-vices market, while allowing the goals of cross-sector integration and internationalization to be achieved.

The rules comprise 14 articles. The main provi-sions are as follows:

Scope of application of the rules: the estab-lishment of a financial holding company con-stitutes a business combination defined under FTL Article 6. If it meets any of the thresh-olds set out in FTL Article 11 Paragraph 1, a prior application must be made to the FTC in accordance with the provisions of the FTL and of the rules.

The rules define the areas in which the FTC and the financial services regulatory authority are required to consult and cooperate with each other regarding business combination cases that involve financial holding compa-nies.

The rules define the entities that are required to apply for permission for a business combina-tion. If an entity that is required to make such an application has not yet been established, an existing financial institution may apply on its behalf.

The documents to be submitted by a financial holding company when applying for permis-sion to make a business combination are de-fined. Such documents include the major fu-ture business operating plans of the enterprises participating in the combination. This is to enable the FTC to examine the impact of the financial holding company's establishment in terms of overall economic beneits and the disbenefits of restriction of competition.

To speed up case review, the rules provide that where a case involving a financial holding company meets the criteria for the FTC's simplified operating procedure for reviewing business combination cases, it may be handled under the simplified procedure. The rules also set a time limit of two months for the FTC to approve or reject an application for combina-tion.

To achieve transparency and standardization of administrative procedures, the rules define the main factors to be considered for a deci-sion. They include:

1.Impact on the competition in financial services markets:

a.The market share of the financial holding company, its subsidiaries and other business entities involved in the combination; the status of their branch establishments; and the possibility of any abuse of market position;

b.The market structure of, and number of enterprises in relevant markets, and the degree to which market concentration will increase subsequent to the combi-nation;

c.The complementarity and substitut-ability of financial products and ser-vices in relevant markets;

d.The existing ownership and control relationships of the business entities participating in the combination;

e.The degree to which competition will diminish in relevant geographical markets subsequent to the combination; and

f.Barriers to entry to relevant markets, if any.

2.Impact in terms of overall economic benefits and the public interest:

a.The prices, and improvements in the quality, of relevant financial products and services;

b.The geographical availability, and available choice, of relevant financial products and services;

c.The relevant policies of the regulatory authority for the financial services in-dustry; and

d.The overall effects on the business en-tities participating in the combination, such as economies of scale or scope.

The FTC may grant permission for a business combination involving a financial holding company to go ahead if the overall benefits to the economy outweigh the disbenefits of re-stricted competition. To ensure that this is the case, the FTC may make the combination subject to time limits or other conditions.