Originally Published on 24th April 2008
The China Banking Regulatory Commission (CBRC) has issued a notice to strengthen its regulation on wealth management products issued by banks in China. This follows on from the increase in customer complaints and disputes regarding new financial products that have recently entered the rapidly changing Chinese economic market.
In recent years, as China's economic reform policies have gradually liberated and opened up the banking industry, a number of new financial products, such as fund investment products, QDII products, derivatives and some other comprehensive wealth management products have been rapidly introduced into this promising market.
However, there has been an increasing number of customer complaints and disputes related to the wealth management business in China. The CBRC has attributed these issues to:
- the investors' lack of knowledge in wealth management products and the associated risks of investing in such products, and
- the non-compliance by some banks with the requirements set out in the Provisional Rules on Commercial Banks' Wealth Management Business (Provisional Rules) and the Guidance on Risk Management of Commercial Banks' Wealth Management Business (Guidance), both of which were issued in September 2005.
In response to these problems, the CBRC issued a Notice on the Issues Relevant to Further Regulating Commercial Banks' Wealth Management Business (YJBF  47) (Notice) on 3 April 2008. The Notice recapitulates the provisions set out in the Provisional Rules and the Guidance and introduces some new provisions in the following six areas:
- product design
- customer evaluation mechanism
- product advertisement and marketing activities
- disclosure of information
- complaints procedures, and
- management of sales staff.
The Notice specifies that the name of the wealth management product must not be misleading or contain any language that is ambiguous. It also restricts banks from selling any wealth management products without market analysis or forecast and without any basis for their pricing.
While banks should set the minimum threshold for their wealth management products based on the risk involved in the products and the risk tolerance level of the target investor group, the minimum threshold must not be lower than RMB 50,000 (or its equivalent in any foreign currency).
One of the most important provisions in the Notice is that banks are prohibited from selling offshore funds or any other offshore investment products which are not permitted by PRC law. It requires banks to design and develop the wealth management products by themselves. This restriction is unclear and seems to contradict the Notice of the Adjustments to the Offshore Investment Scope of Overseas Wealth Management Business of Commercial Banks on behalf of Their Clients issued by the CBRC in May 2007.
Further clarification on the scope of such restriction is necessary to further assess its impact on the arrangement between the offshore product manufacturers and the QDII banks in relation to the purchase of offshore investment products by the QDII banks. Mallesons is currently in consultation with the CBRC on the practical implication of this restriction and will keep you updated.
Customer evaluation mechanism
One of the areas that the CBRC has identified as problematic is investors' lack of knowledge of investment risks. Through the Notice, the CBRC highlights the key requirements that banks should satisfy when evaluating the financial position of their customers. The CBRC has requested banks to establish a client assessment mechanism and conduct "know-your-client" procedures to fully understand their clients' position. This includes a thorough understanding of the client's financial position, investment objective, investment experience, preferences on risks and return on investments.
Under the Notice, banks are now required to conduct onsite face to face customer evaluations in order to determine the suitability of the wealth management products for the customer. Such evaluations cannot be conducted via the internet or by phone.
Product advertisement and marketing activities
The marketing materials for wealth management products must disclose the key features of any important issues relating to the products. Risk disclosure statements should be displayed on the most prominent area on the first page of the marketing materials with an explanation of the worst case scenario and the worst results of the investment. The Notice also prohibits banks from including the words "anticipated yield" or "highest yield" in the marketing materials if they cannot disclose the calculation mechanism or provide an accurate basis for a forecast of the wealth management products.
If the marketing materials contain information of the past performance of a certain product or business or forecasts as to any future performance, the marketing materials should:
- set out the period of evaluation of performance and source of such information, and
- warn the readers that past performance or forecast of future performance should not be taken as a reliable basis for the ultimate performance of the product.
Disclosure of information
The Notice imposes a minimum requirement that bank statements relating to the wealth management products must be provided to the customers on a monthly basis.
Banks are also required to take measures to ensure that their customers will receive the information disclosed by them. The agreement between the banks and their customers should specify means of communication or disclosure of information. Information relating to the wealth management products disclosed on the websites of the banks will not be treated as being received by the customers unless such form of disclosure has been agreed by the customers.
The Notice reinforces the need to establish a transparent, efficient and comprehensive mechanism to deal with customer complaints. This also entails allocating sufficient resources to ensure the effective operation of the customer complaints system.
Management of sales staff
The Notice re-emphasises the importance of maintaining a comprehensive system to manage wealth management employees in the banks.
In the Notice, the CBRC requests all banks to conduct self-inspection of their wealth management business and file their self-inspection and rectification reports with the CBRC by 30 May 2008. The local CBRC will also conduct anonymous inspections of banks in their own jurisdictions and report to the CBRC by 30 April 2008.
The views set out in this publication are based on our
experience as international counsel representing clients in their
business activities in China. As is the case for all international
law firms licensed in China, we are authorised to provide
information concerning the effect of the Chinese legal environment.
However we are not admitted to practice Chinese law and so are
unable to issue opinions on matters of Chinese law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.