New Regulations on Commercial Banks' Individual Wealth Management Businesses

In order to prevent commercial banks from indirectly evading the interest rate regulations, commercial banks have not been permitted to sell any wealth management products with a commitment for a fixed return. As they were not able to offer their individual clients products with competitive returns, the competitiveness of commercial banks in the financial industry was largely undermined. Not surprisingly, commercial banks gradually lost some of their high-end clients with greater investment requirements, who turned to other financial institutions that were able to provide them with higher-return wealth management products.

New wealth management products

Fortunately for commercial banks, the tight restrictions on their participation in the wealth management sector have now been replaced by new provisions under the Tentative Measures. According to the Tentative Measures, individual wealth management products can be classified in two categories:

(i) wealth management products with no commitment for a fixed return, and

(ii) wealth management products with a commitment for a fixed return ('products with fixed returns'), which can be further sub-divided into principal-protected and non principal-protected wealth management products.

Under the Tentative Measures and the Guidelines, wealth management products will be more highly regarded by the regulator as a kind of investment instrument compared with deposits, especially for products with fixed returns. Unlike deposits, where individual clients can obtain fixed returns as provided and protected by law, clients buying wealth management products from commercial banks are required by the Tentative Measures to carry their own investment risks.

Conditions related to promised returnS

Pursuant to Article 24 of the Tentative Measures, if the promised fixed return ('promised return') for products with fixed returns is higher than the interest rate based on the current PBOC Rate, such a promised return will be subject to additional conditions. These conditions may include commercial banks having the option to adjust the term of the product or being able to change the currency denominating the payment to the client.

Furthermore, in the event that the client can obtain a promised return that is higher than the current PBOC rate, the Tentative Measures provide that commercial banks are prohibited from engaging clients, if notice of such conditions has not been provided to the client. In addition, the Tentative Measures and the Guidelines include provisions for risk disclosure requirements, minimum capital levels for wealth management products and customized client management requirements.

These provisions indicate that a dividing line has been drawn between wealth management products and deposits. For commercial banks or individual clients, the risks and returns under the wealth management regime is quite different from those applicable to deposits.

Direction for commercial banks

With the removal of the restriction on providing fixed return products, it appears that commercial banks may be in a better position than before to compete with other financial institutions, such as fund management companies and trust and investment companies with wealth management businesses. By offering more diversified products, commercial banks may be able to attract more funds and clients under the Tentative Measures and Guidelines. However, due to the treatment of banking as a business segregated from other financial industries under the current laws, the investment channel available to commercial banks in China is still very narrow. Thus, an exploration of new ways to meet competitive return requirements under the relevant wealth management products would be particularly worth considering for commercial banks.

With their unique predominance in China, given their vast networks and strong customer bases, commercial banks should also seek cooperation with other financial institutions for wealth management business. Since the ceiling on the borrowing interest rate has been removed for commercial banks, such cooperation would be possible and easily arranged with an interest rate covering the funding cost and margin for commercial banks.