Key changes to regulations on sale of WMPs

By Ren Guobing and Wang Jin, Jingtian & Gongcheng
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On 11 May 2021, China Banking and Insurance Regulatory Commission (CBIRC) issued the Provisional Measures for Sales Management of Wealth Management Products at Wealth Management Companies, to be effective from 27 June 2021. The measures contain eight chapters and 69 articles, covering all aspects of sales activities of wealth management products (WMPs), and are the latest comprehensive regulatory rules on the sale of WMPs.

Compared to existing regulatory rules on WMPs and related sales activities, the measures raise new requirements for the sales of WMPs, including the regulations on the scope of WMP sales agencies, sales compliance, and ways of advertising and presenting product performance relative to the benchmark and protection of investors. This article analyses the key changes.

任国兵, Ren Guobing, Partner, Jingtian & Gongcheng
Ren Guobing
Partner
Jingtian & Gongcheng

Scope of sales agencies

Compared to existing regulatory rules, the scope of WMP sales agencies stipulated by the measures has been eased in some ways but tightened in others.

On the one hand, the measures have expanded the sales channels for WMPs. A wealth management company could commission other wealth management companies outside of banks to sell its WMPs after the measures became effective. Although WMPs, unlike mutual funds, still cannot be sold on a commission basis via a broader range of channels such as securities firms, third-party independent sales agencies, etc., the sales channels have already been enriched compared to before the measures were announced.

On the other hand, the measures explicitly provide that “no non-financial institution or individual may sell WMPs on a commission basis unless it has been approved by the financial supervision and regulation departments”. This means that third-party internet platforms and other specialist agencies without licences for commissioned WMP sales cannot sell products of wealth management companies on a commission basis.

Currently, financial institutions with licences for commissioned WMP sales mainly consist of banks, which have massive sales networks and abundant client bases. If banks can seize the initiatives according to the requirements in the measures, and actively bring in WMPs of different wealth management companies, their wealth management business segment shall expect significant growth.

王晋, Wang Jin, Paralegal, Jingtian & Gongcheng
Wang Jin
Paralegal
Jingtian & Gongcheng

Sales compliance

To further strengthen compliance management on sales of WMPs, the measures stipulate that sales agencies of WMPs should appoint departments and personnel responsible for reviews and supervision of the legitimacy and compliance of sales activities related to WMPs, and should ensure that such departments and personnel can fulfil duties independently and effectively.

Personnel from the above-mentioned departments are prohibited from assuming additional positions such as operation or management roles, which may have potential conflicts of interest with their existing job responsibilities. Both sales agencies and wealth management companies are required to perform risk evaluations and product ratings on WMPs, and come to joint agreements on consistent product rating standards.

Periodic assessments on sales agencies should be made by wealth management companies, which provides the basis for wealth management companies to monitor sales channels. Shared sales responsibilities between sales agencies and wealth management companies should be clearly defined.

Advertising

Another significant change in the measures is that stricter rules are imposed on the advertising and presentation of performance relative to the benchmark during the sales of WMPs. The measures clearly define WMPs as net worth management products that cannot guarantee principals and returns. On such basis, the measures further prohibit advertising of “expected returns” of net worth products.

In the past, performance relative to the benchmark could only be used to calculate investment returns and compensation for product managers, but often caused confusion among investors due to its misleading presentation. The measures list new requirements for advertising and presentation of performance, prohibit its singled-out or highlighted presentation, and require companies to give a detailed explanation on reasons for the choice of benchmark, basis for measurement, or methods used in the calculation.

Currently, different wealth management companies have various ways to disclose the performance of net worth products relative to benchmarks, including absolute returns, return ranges, linkages to securities indices, correlation to the benchmark interest rate of fixed deposits, etc. Whichever way is adopted, based on the latest requirement of the measures, wealth management companies and sales agencies must explain the calculation basis and relevant background to clients, such as reference to historical levels of similar products or similar strategies.

The latest requirement of the measures is good for prohibiting covert advertising of expected returns. It can promote a better transition towards net worth products and propel the removal of rigid redemption of WMPs.

Investor protection

The measures uphold the principle of suitability, i.e., selling suitable products to suitable investors. Based on existing regulatory rules, the specific requirement on evaluation of investors’ risk tolerance, due diligence and risk evaluation of products is further clarified.

Furthermore, the measures add and restate specific rules that protect the interest of investors, including the prohibition of soliciting investors to take short-term positions, investors of products undergoing fee adjustments being allowed to redeem their shares, etc.

It is noteworthy that the measures added new rules to information protection, which prohibit commissioned sales agencies from unauthorised disclosure of client information to any third party. The authors suggest that wealth management companies and sales agencies should amend relevant sales documents about WMPs accordingly, so as to gain authorisation from investors to use their information in compliance with the latest requirement of the measures.

Ren Guobing is a partner and Wang Jin is a paralegal at Jingtian & Gongcheng

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ren.guobing@jingtian.com

wang.jin@jingtian.com

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