10 November, 2018
Following the September 28, 2018 promulgation of the Measures for Supervision and Administration of Wealth Management Business of Commercial Banks (“Wealth Management Regulations”), on October 19, 2018 the China Banking and Insurance Regulatory Commission (CBIRC) released the Administrative Measures on the Wealth Management Subsidiaries of Commercial Banks (Consultation Paper) (“Measures”), which aim to regulate commercial bank subsidiaries specifically established to undertake wealth management activities (“wealth management subsidiaries” or “subsidiaries”).
As we reported in a Client Briefing earlier this month, the Measures focus on establishing a set of regulations in line with those that govern “other similar financial institutions” (such as the securities investment fund management companies (“FMC”) regulated by the China Securities Regulatory Commission (CSRC)), thereby ensuring that wealth management subsidiaries are able to compete in the asset management market. In its responses to the press Q&A about the Measures, the CBIRC further clarified its intention to encourage commercial banks to establish wealth management subsidiaries and consolidate existing wealth management businesses. The CBIRC is of the view that most commercial banks have already completed the internal restructuring of their wealth management businesses, thereby laying the foundations for their independent operation, and that the time is now ripe to establish subsidiaries to undertake wealth management activities. In terms of the application of the law, the CBIRC has indicated that wealth management subsidiaries shall comply with the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (“Guiding Opinions”), the Wealth Management Regulations and the Measures, with the Measures detailing how the various provisions of the Guiding Opinions and Wealth Management Regulations should be applied or exempted. In the press Q&A, the CBIRC stated that as the next step, a commercial bank can elect to establish a new wealth management subsidiary or to consolidate its wealth management activities under an existing subsidiary that is already engaged in wealth management. Upon establishment of the wealth management subsidiary, the CBIRC further requires such bank to cease any wealth management activities, except for the disposal of any existing products.
Below is a summary of some of the key content of the Measures.
Nature of Institution and Scope of Business. A wealth management subsidiary is defined in the Measures as a type of non-bank financial institution that is regulated by the CBIRC. According to the Measures, a wealth management subsidiary may apply to undertake all or some of the following activities:
(i).issuing wealth management products to non-specific targets or the general public, and investing and managing the assets entrusted by those investors, i.e. publicly-raised wealth management;
(ii).issuing wealth management products privately to investors, and investing and managing the assets entrusted by those investors, i.e. privately-raised wealth management;
(iii).asset management advisory and consulting services; and
(iv).other businesses as approved by the CBIRC.
Shareholding Structure. A wealth management subsidiary shall be established and majority-owned by a commercial bank. Domestic and foreign financial institutions or domestic non-financial enterprises may invest in the subsidiary as a minority shareholder. The Measures stipulate the qualification requirements for both sponsoring shareholders and other shareholders, and describe in the form of a negative list the circumstances under which an investor cannot become a shareholder in a wealth management subsidiary. The CBIRC encourages commercial banks to attract experienced and high-profile foreign financial institutions to invest in their wealth management subsidiaries. It is worth noting that the Measures provide that any investor, together with their affiliates and persons acting in concert, shall not invest in more than two wealth management subsidiaries or control more than one wealth management subsidiary. We also note that the restrictions on the number of wealth management subsidiaries in which banks are allowed to invest does not include any FMCs regulated by the CSRC in which they have already invested.
Registered Capital and Other Requirements. The minimum registered capital of a wealth management subsidiary shall be RMB 1 billion, and it shall abide by all relevant requirements on corporate governance, risk management, internal control, practitioners, management information system and so on.
Business Rules. In order to ensure that the regulations governing wealth management businesses are consistent with the regulatory standards of other types of asset management institutions, the Measures differ from the earlier Wealth Management Regulations in that the Measures:
(i).allow publicly-raised wealth management products issued by subsidiaries to directly invest in stocks;
(ii).require no minimum sales threshold amount of wealth management products;
(iii).allow for subsidiaries’ wealth management products to be distributed by banking financial institutions or other institutions approved by the CBIRC;
(iv).do not require an individual to sign documents on site at the business premises when purchasing wealth management products for the first time;
(v).require the investment balance of non-standardized credit assets to not exceed 35% of the net assets of the wealth management product;
(vi).allow subsidiaries to issue structured wealth management products; and
(vii).require wealth management subsidiaries to maintain a reserve fund of 10% of management fees collected from wealth management products, and to abide by relevant requirements on net capital.
The Measures require wealth management subsidiaries to establish effective risk isolation systems between their shareholders and other affiliates. In addition, wealth management subsidiaries are required to comply with regulations relating to leverage ratios, liquidity, concentration ratio management and other qualitative and quantitative regulatory requirements.
Wealth Management Partnering Institutions. The Measures list three main types of wealth management partnering institutions (“partnering institution”), namely:
(i).the issuer of an asset management product that receives an investment from a wealth management product;
(ii).an institution that is granted an investment mandate by a wealth management product; based on the terms of the mandate, and
(iii).an investment advisor engaged for the investment management of a wealth management product.
In contrast to the Wealth Management Regulations, the Measures detail the circumstances where a partnering institution must be a licensed financial institution (i.e., a financial institution that is approved or approved by a financial regulator) or not, namely:
(i).an issuer or institution contracted to undertake the investment for a publicly-raised wealth management product must be a licensed financial institution having professional qualifications and regulated by the financial regulatory authorities in accordance with the law;
(ii).either (a) an investment advisor of a publicly-raised wealth management product, or (b) an issuer of, an institution that is granted a contract to invest on behalf of, or an investment advisor to a privately-raised wealth management product, may be other than a licensed financial institution, and would only be required to hold the necessary professional qualifications, to meet the requirements of the law, the administrative regulations, the Guiding Opinions and any other relevant regulatory requirements of the financial regulatory authorities, and be regulated by financial regulatory authorities in accordance with the law.
The Measures indicate that a private investment fund manager that has been a member registered with the Asset Management Association of China (AMAC) for more than one year without any record of material violation against any laws or regulations, and that has met all other requirements prescribed by the financial regulatory authorities is qualified to act as a partnering institution. Additionally, the Measures require that, in order to act as an investment advisor of a wealth management subsidiary, a private fund manager must be a private securities investment fund manager with at least three investment management personnel with three or more consecutive years of traceable securities or futures investment management experience, and there have been no records of bad practice.
The Measures further stipulate that an investment advisor engaged by a wealth management subsidiary or an affiliate of such investment advisor shall not invest its proprietary funds in a junior class of the structured wealth management products issued by such wealth management subsidiary.
Natasha (Qing) Xie, Partner, Jun He