With the intensive expansion of all sorts of financial products since 2013, the China Banking Regulatory Commission has gradually encouraged steady growth in the bank asset management industry. Against this background, the Beijing Arbitration Commission/Beijing Arbitration International Centre (BAC/BIAC) has seen a number of cases relating to the bank asset management industry. Within these cases, a rational understanding of risk, solving disputes properly and balancing out different parties’ interests appropriately are yardsticks for determining the maturity of arbitrators and arbitration institutions in managing cases.
If you want to understand the essence of a bank asset management business, the first step is to distinguish clearly commercial risks from legal risks. Managing a business and complying with legal requirements often present different sets of risks. The better a business runs, the easier for the operator to over-focus on development and overlook legal-related flaws. So, when something bad happens, the so-called “business judgment rule” is often the primary blame for blurring legal and commercial risks. This naturally calls for asset management stakeholders to consider and draw a clear line between commercial and legal risks at the outset, so as to provide guidance for adjudicators in the event of risk incidents.
Risk planning for assets managers (within an asset management business relationship) can be generalized into four aspects:
- Risks associated with legal determination. While asset management and trusts are in practice very similar, if not identical, in arbitration cases definition for even the most commonly seen asset managing products are disputed. To determine whether a trustor and trustee relationship exists (and whether fiduciary duty of trustee applies), the current practice of tribunal is to look substantively into the real intention of the parties;
- Risks associated with information disclosure and truthful description. On one hand, product sales must put an end to giving misleading sales statements in the pursuit of higher performance. On the other hand, in determining whether the sales should bear the corresponding responsibilities for making any “cover all lost” commitments, the tribunal will generally also consider the identity of investors and their experiences on top of the sales representations;
- Risks associated with identifying qualified investors. Due to high identification costs, asset managers may not be required to uphold a strict identification gauge at all times. However, where the circumstance suggests that an asset manager is aware of, or ought to have been aware of, an investor being unqualified, the obligation to investigate cannot be removed easily. Excuses such as the receiving of an “investor’s declaration of property” or a purchase amount over the required level are unlikely to be accepted;
- Risks associated with the exercising of duty of care. Asset managers are
subject to a strict duty of care throughout the asset managing period. Especially in the event of any investee’s capital crisis or breach of contract, the asset managers will be subjected to a higher standard of prudency in realizing and disposing assets. Where there is a sudden change of game plan, investors should be notified and explanation given in a sufficient and timely manner.
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Zhang Haoliang is a division chief and Liu Nianqiong is a case manager at Beijing Arbitration Commission/Beijing International Arbitration Centre. BAC/BIAC’s intern Joshua Ngai Jun also contributed to the article