China – CBIRC Issues Administrative Measures On Wealth Management Subsidiaries.

14 December, 2018

 

On December 2, 2018, following a one month period for public comment, the China Banking and Insurance Regulatory Commission (CBIRC) issued its Administrative Measures on the Wealth Management Subsidiaries of Commercial Banks (“WMS Measures”) as an ancillary regulation to the Measures for Supervision and Administration of Wealth Management Business of Commercial Banks (“Wealth Management Measures”) that it had issued on September 28, 2018. In doing so, the CBIRC has for the first time detailed the means by which the wealth management subsidiaries of banks (“WMSs”) are able to compete in the wealth management market.

 

The issuing of the WMS Measures also provides a benchmark for the reform of the asset management industry. All main ancillary asset management regulations have now been released, and the framework to regulate asset management industry has become apparent.

 

While the final version of the WMS Measures contains no significant changes compared with the earlier CBIRC’s Consultation Paper of October 19, 2018 ("Consultation Paper”)1, there are a few points worth noting:

 

I. Determination of the underlying trust relationship for wealth management products

 

The Wealth Management Measures and the Consultation Paper both clarify that the property of wealth management products (“WMPs”) shall be independent from the proprietary assets of any manager or custodian, though neither of them explicitly stipulates the underlying legal status of WMPs. However, in the Media Q&A accompanying the release of the WMS Measures, the CBIRC indicates that the legal basis for wealth management activities is a trust relationship, and it further elaborates that commercial banks and their WMSs shall take on their clients’ entrustment and shall perform their wealth management functions diligently, in good faith and in an honest and trustworthy manner. In so defining the underlying legal relationship of WMPs, the CBIRC moves into alignment with the China Security Regulatory Commission (CSRC).

 

II. Relax restrictions on investing using proprietary funds

 

In the Consultation Paper, in line with the Wealth Management Measures, WMSs were prohibited from purchasing their own WMPs with their own funds. In the WMS Measures, the requirements have been somewhat loosened, with WMSs permitted to invest proprietary capital in their own WMPs, under the presumption that there is compliance with relevant risk management requirements. These include, but are not limited to: (i) The total amount of the investment in a WMS’s own WMPs shall not exceed 20% of its proprietary capital; (ii) The investment in a single WMP using proprietary capital shall not exceed 10% of net assets of such single WMP; and (iii) Proprietary capital shall not be invested in any junior class of structured WMPs. 

 

III. Adopt the same investment and trading regulations as other asset managers

 

The WMS Measures provide further details of the investment and trading requirements for WMSs, taking as their primary reference the relevant regulations on securities investment fund management companies (“FMCs”).

 

These include requiring WMSs to

 

(i) Implement a centralized trading system, and to keep separate the functions of investment management and trading activities;

 

(ii) Keep track of investment and trading activities through a fair trading system and a mechanism to identify any abnormal trading;

 

(iii) Monitor transactions among WMPs in both the same and opposite directions. The WMS Measures additionally require all directors, supervisors, senior managers and employees of WMSs to provide reports on the status of their investments in securities.

 

Given that publicly-raised WMPs issued by WMSs are permitted to directly invest in stocks, we are of the view that by including the above-mentioned requirements in the final version, the WMS Measures will serve to strengthen the compliance of WMSs in their investment operations and thereby help protect the interests and rights of investors.

 

Of note, the Media Q&A mentions that the CBIRC is currently developing net capital and liquidity management regulatory rules for WMSs. We anticipate that such rules are likely to be very much in line with those that already apply to FMCs. 

 

IV. Our Observation

 

As we observed in our Client Briefing of October 8, 2018, the WMS Measures aim to establish a set of regulations in line with those of other authorities that govern “other similar financial institutions”, such as the FMCs overseen by the CSRC. Compared with the current Wealth Management Measures, the greater detail in the WMS Measures aims to encourage banks to spin off their wealth management businesses to their subsidiaries. This objective is reflected in the amendments that have been made to the Consultation Paper, which further pave the way for WMSs to compete in the asset management market. 

 

As of the end of November 2018, a total of 20 commercial banks had already announced their intention to establish WMSs. The full list, which includes the ‘Big Four’ – Bank of China, Agricultural Bank of China, Industrial and Commercial Bank of China and China Construction Bank – is provided below, along with details of banks’ joint venture FMCs where they have been identified.

 

The first WMS license is expected to be issued in 2019. We will continue to closely watch any related developments and look forward to sharing them with our valued clients.