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6 March, 2017
In China, it is undeniable that an internal consulting paper from a financial regulatory department would usually be considered an important information source, used by market institutions as a bellwether to predict regulatory movements. In general, the impact of this kind of information, upon wide-release by the media, should not be underestimated, even though the source of such information may have not been officially confirmed. On February 21, media reports said the Guiding Opinions on Asset Management Business Regulation of Financial Institutions (“Opinions”), the crafting of which was led by the People’s Banks of China (“PBOC”), had been reviewed and received comments from the China Banking Regulatory Commission (“CBRC”), China Securities Regulatory Commission (“CSRC”) and China Insurance Regulatory Commission (“CIRC”) and other government agencies. Subsequently on February 22, Wenhui Chen, the vice chairman of the CIRC, when being asked about the Opinions in a Q&A session of a press conference, admitted that the Yi Hang San Hui (i.e. the PBOC, CBRC, CSRC and CIRC) had been intensely engaged in a unified design for the overall regulatory frame of asset management businesses, and pointed out that due to the commonality of asset management businesses, such unified regulatory rules would be essential.
Due to the fact that the contents of the Opinions have not been officially confirmed by any authority and some of it could possibly change as predicted by the market, we will not discuss any specific terms in this context. Instead, based on the key points of the document disclosed and summarized in the media, we offer our observation of its overall purpose, the reasoning in its crafting, and some of the possible implications it may have.
The Opinions apply to the asset management businesses engaged by financial institutions, i.e. the investment and management business conducted by any financial institution entrusted by an investor with respect to the entrusted assets, such as a bank, trust company, securities firm, fund management firm, futures broker or insurance company (“Asset Management Institution”). The contents of the Opinions generally include: (i) formulating a unified standard for qualified investors, (ii) categorizing the asset management products in accordance with the fundraising methods, (iii) providing the duties of prudent operation and due diligence of Asset Management Institutions, (iv) in order to prevent the risk of shadow banking, imposing qualification requirements on asset management products to invest in non-standardized assets, (v) in order to prevent systematic risk, imposing requirements on Asset Management Institutions as to the risk isolation, independent custody, capital requirement and risk reserve allocation, restricting the leverage multiples and prohibiting multiple layers of “nesting”, (vi) requiring Asset Management Institutions to report information data to the PBOC for risk monitoring efficiency. With respect to the Yi Hang San Hui, the PBOC will take responsibility for the macro prudential regulation and formulating the regulatory standards of the asset management businesses jointly with the CBRC, CSRC and CIRC, whilst the CBRC, CSRC and CIRC will take charge of market access and daily supervision of the asset management businesses as well as the investor protection.
I. The Opinions are primarily meant to cope with risk.
The Opinions are clearly oriented to problem-solving. The goal of the drafters is to focus more on the bottom line of preventing systematic risks, instead of radically restructuring the financial regulatory framework. Even though the crafting of the Opinions belongs to an “upper level infrastructure design”, it still has the characteristics of being temporary and transitive. One possible reason may be that the relevant legislative process is comparatively slow, while the prevention of systematic financial risks necessitates no delay.
II. The Opinions aim to unify the regulatory standards.
The Opinions are meant to formulate unified asset management business regulatory standards, with two major goals: one is to put the micro regulation under the frame of macro prudential regulation, while the other goal is to use the “regulation according to functions” to cover the deficiency of “regulation according to institutional types” so as to prevent regulatory arbitrage. The Opinions intend to “fix the situation” without adjusting the current financial regulatory functions, i.e., to unify the regulatory standards and rules. The so called “standards and rules” not only include extracting the business rules that have commonality for the asset management products of the same type, but also include formulating some targeted specific regulatory requirements so as to prevent certain kind of risks. It is worth noting that as for the latter, the CBRC, CSRC or CIRC has formulated or is in the process of formulating some regulatory rules which may overlap with the Opinions, and yet, the Opinions will consider itself as the unified regulatory standards, on the grounds that the PBOC might believe such risk prevention measures shall also fall into the category of its macro prudential regulation.
III. Promulgation of the Opinions will have profound implications.
If the Opinions are officially promulgated, we can anticipate in the short term that the respective regulations governing the asset management business of each financial regulatory department will be faced with large-scale revamping so as to conform to the Opinions. In the long run, the PBOC, on the basis of commanding the information data of the asset management products, may further elaborate or adjust these kinds of “standards and rules” in accordance with the requirements of macro prudential regulation, increasing the possibility of it being a so called “super regulator”.
We suggest the Asset Management Institutions pay close attention to the progress of the Opinions so as to evaluate the impact it might have on their current businesses.
For further information, please contact:
Natasha (Qing) Xie, Partner, Jun He
xieq@junhe.com
