CBRC promotes orderly wealth management

The Circular requires commercial banks to classify their wealth management clients as those with investment experience and those without. The Circular further requires that the price of a wealth management product exclusively sold to experienced clients should not be less than Rmb100,000 (US$15,000). Such a product is not allowed to be sold to clients without investment experience.

The requirement of 'merchantability' had already been set forth by the CBRC in its previously promulgated Guidelines for Managing the Risks Attaching to the Personal Financial Management Business of Commercial Banks. This was in respect of individual wealth management consulting services and overall wealth management services. But, for the first time, it is now required that “clients should be stratified necessarily” under the Risk Management of Individual Wealth Management Consulting Services chapter.

However, neither the Circular nor other relevant laws and regulations ever set forth specific standards for client classification. For example, the Circular only required commercial banks to make an adequate evaluation of clients' financial status, their investment objectives, experience and anticipation, and their risk preference, perception and tolerance. And this need only be in accordance with the principle of know your customer, with such evaluations to be conducted at commercial bank outlets in the presence of clients and not through the Internet or telephone.

Therefore, a commercial bank was only able to judge whether a client had any investment experience in accordance with its own discretionary standards. And the lack of uniform standards in practice meant that such judgement would be inconsistent from one commercial bank to another.

When regulatory bodies in other countries require classification for clients, they set forth specific provisions in respect of the standards to judge whether a client has any investment experience. Accordingly, more operational provisions are necessary in China.

Methods

It is provided in the Circular that a commercial bank may entrust a financial institution that has been approved or permitted by the relevant regulatory bodies to conduct investment management of wealth management funds. On most occasions, commercial banks entrust trust companies by using a mode called entrustment plus trust.

However, what liabilities should a commercial bank assume if a trust company breaches any of the trust documents and this causes loss to trust property and further results in loss to wealth management funds?

The entrustment plus trust mode is not a “delegation under entrusted agency”, as covered by Article 400 of the PRC Contract Law, and the principals of the wealth management plan cannot claim directly against the trust company. A delegation under trust is not covered by Article 30 of the PRC Trust Law, and the commercial bank is not liable for breach of the trust company.

The wealth management plan documents of some commercial banks provide that it, as trustor of the trust plan, shall claim against the trust company for loss – with any insufficient amount to be borne by investors of the plan.

Before the issuance and implementation of the Circular, wealth management products sold by commercial banks were on most occasions under their own custody. The Circular requires commercial banks to entrust a third party – a commercial bank qualified to hold securities investment funds under custody – to act as custodian when selling wealth management products. This benefits the safety of wealth management funds.

Investment directions

Specific requirements are set forth in the Circular in respect of wealth management funds investing in fixed income instruments, bank credit assets, financial derivatives and structured products. For example, they are not allowed to invest in stocks at secondary market or securities investment funds in connection with such stocks. Nor can they invest in the equity interests of non-listed enterprises and the stocks of listed companies that are not issued or traded publicly.

There are some exceptions in the Circular. For example, commercial banks are allowed to offer services through private banking for some high net worth clients' investments. However, neither the Notice nor relevant laws and regulations have ever set forth admittance thresholds for private banking clients. In practice, when a commercial bank conducts private banking, the bank itself will normally set forth thresholds for its clients.