11 October, 2018
On September 28, 2018, the China Banking and Insurance Regulatory Commission (CBIRC) released the Measures for Supervision and Administration of Wealth Management Business of Commercial Banks (“Measures”) together with a Media Q&A (“Q&A”). The final version of the Measures does not make any substantial changes to an earlier consultation paper, released on July 20, 2018. Following are some of the elements we believe to be of particular interest:
1. Administrative Measures on Wealth Management Subsidiaries
As the implementing rules of the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (“Guiding Opinions”) jointly issued by the People’s Bank of China, CBIRC, China Securities Regulatory Commission (CSRC) and State Administration of Foreign Exchange, the Measures apply to wealth management activity undertaken by a commercial bank itself, rather than wealth management business activity that is carried out through a subsidiary. Activities of any wealth management subsidiary established by a commercial bank specifically to undertake wealth management (“wealth management subsidiary” or “subsidiary”) will be subject to the Administrative Measures on the Wealth Management Subsidiaries of Commercial Banks (“Measures on Subsidiaries”), which have as yet to be published. It is our observation that the Measures and the Measures on Subsidiaries are likely to have different intentions: the Measures focus on implementing the requirements of the Guiding Opinions, while the Measures on Subsidiaries aim to establish a set of regulations that benchmark themselves against the regulations of “other similar financial institutions”, such as mutual fund management companies regulated by the CSRC.
According to the Measures, the regulatory provisions for commercial banks wishing to establish wealth management subsidiaries will be separately formulated by the CBIRC. The Q&A provide the information that the CBIRC has already drafted the Measures on Subsidiaries and will issue them in due course. In the meantime, the Q&A indicate that the Measures on Subsidiaries will accept comments from market participants on the following topics: (i) reducing the minimum subscription threshold of wealth management products; (ii) expanding sales channels; (iii) bringing qualified private fund managers into the scope of wealth management partner institutions; (iv) removing the compulsory requirement for an individual to sign documents at the branch of a commercial bank when purchasing wealth management products for the first time; and (v) allowing the issuance of structured products; and the Q&A further state that the CBIRC will allow the publicly fund-raised wealth management products issued by subsidiaries to invest in stocks directly or indirectly.
These show that the CBIRC has already made preparations for the wealth management subsidiaries it regulates to compete in the asset management market. While the various asset management entities are subject to different regulatory requirements, the CBIRC’s comments in the Q&A would appear to suggest that it is inclined to maintain consistency with the CSRC’s regulations on asset management businesses, meaning that it is unlikely to impose overly strict rules that could place wealth management subsidiaries at a competitive disadvantage. We would expect that the CBIRC’s approach may have indirect impact on the CSRC’s plans for and consideration of the regulations on the asset management business and recommend our clients to continue to assess development trends and their likely impact.
2. Two Positive Movements
The Q&A address two key questions: firstly, whether a commercial bank or a wealth management subsidiary will be allowed to partner with a private fund manager; and, secondly, whether a commercial bank’s overseas wealth management business will be subject to the restrictions of the Measures.
(1) As referred to in the Q&A, there are currently three major types of institutions with which a commercial bank may collaborate or partner on its wealth management business, namely, (i) the issuer of an asset management product that accepts an investment by another wealth management product; (ii) an institution that is granted a mandate for investment subject to terms of the mandate; and (iii) an investment advisor.
As was the case in the consultation paper, the final version of the Measures stipulates that any partnering wealth management institution shall be a financial institution with the required professional qualifications and shall be regulated by the financial supervision and regulation departments in accordance with the law, or shall be another institution that is recognized by CBIRC.
The Q&A indicate that the measures on subsidiaries will encompass qualified partnering institutions to include private fund managers that satisfy certain qualifications and conditions. This provides a response to the question of whether private fund managers may be engaged by a commercial bank or a wealth management subsidiary as a partnering institution. We expect that many private fund managers, including foreign-invested private fund managers with good credentials, will look forward to further clarification on qualifications and conditions when the measures on subsidiaries are made available.
(2) The Guiding Opinions stipulate that cross-border asset management products and businesses shall be governed by reference to the Guiding Opinions. The Measures also provide that overseas wealth management activity conducted by commercial banks with corresponding licenses shall be governed by the Measures and abide by the laws, administrative regulations and the relevant rules of financial supervision and regulation departments. To respond to a wide concern of commercial banks about the impact on the overseas wealth management businesses, the Q&A clarify that commercial banks shall carry out their activities, namely the Qualified Domestic Institutional Investor (QDII) activities, in accordance with the existing regulations on overseas wealth management business, and that the implementation of the Guiding Opinions or the Measures “will not influence the current business models of QDII.”
Our observation is that the CBIRC’s comments provide reassurance for commercial banks engaging in QDII business. Commercial banks currently do not need to address the requirements on “nesting” that relate to the calculation of offshore layers of their QDII products, nor to apply the principal of “look-through” to the underlying overseas assets of QDII products, unless the CBIRC amends the regulations on QDII otherwise.
Another question that arises is whether the CSRC will follow the same approach to exempt the QDII activities from the requirements specified in the Guiding Opinions, and also the similar Qualified Domestic Limited Partner (QDLP) and Qualified Domestic Limited Enterprises (QDIE) activities. We would wish the CSRC to refer to the CBIRC’s practices in granting appropriate exemptions to such cross-border businesses. In other words, businesses that undertake QDII, QDLP and QDIE activities shall continue to be subject to the current regulations governing QDII, QDLP and QDIE, and the Guiding Opinions and its implementing rules shall not impact upon current business models of QDII, QDLP or QDIE.
We will closely monitor CSRC’s implementation of rules relating to the Guiding Opinions and any further development of the CBIRC’s Administrative Measures on Wealth Management Subsidiaries and will promptly share our observations with you.
