Asset management products, as a type of important financial products, are characterized by portfolio management and complex transaction structure. The financial risks they have are represented by a mixture of multi-market and multi-category risk factors. An asset management product portfolio may cover money market instruments, bonds, non-standardised creditor’s right, and unlisted equity, etc. Asset management products that are designed for non-standardised creditor’s right, unlisted equity, and other non-standardised assets tend to face more risks that are more complex.
Compliance risks at the level of laws applicable to the industry. In China, asset management is a highly regulated financial business field. Different types of asset management products have different regulators, issuers, target assets and investors, and are subject to distinctive regulatory laws, regulations and regulatory standards.
For a period, asset management products were designed through multi-layer investment and channels for arbitrage. In 2018, the People’s Bank of China, China Banking and Insurance Regulatory Commission, China
Securities Regulatory Commission, and State Administration of Foreign Exchange jointly promulgated the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions to unify the regulatory standards for asset management products to some extent.
These guiding opinions, however, do not reverse the overall pattern of regulation by categories and by subjects. Regulatory policies for asset management tend to be further standardised and unified. Asset management products still face the risk of uncertainty in regulatory policies applicable to the industry. Even window guidance of the regulators may have a major impact on the creation, issuance and stability of asset management products, and the development and design of asset management products, especially innovative ones, are still confronted with high risks and challenges.
Compliance risks at the transaction structure level. The transaction structure of asset management products is generally complex. Multiple transaction participants, multiple layers of investment in different asset management products, complex transaction procedures, and the changing industries of target assets all tend to result in a complex transaction contract system.
Different types of contracts will be subject to different laws and regulations, which involve a number of law and regulations systems in different fields. Significant regulatory adjustment, updates and applicable prohibitive provisions bring major challenges to the compliance of transaction structures of asset management products.
In the case of multi-layered investment in asset management products with different regulatory systems, asset management products with more layers are required to comply with more cross-regulatory compliance requirements of different regulators for the assets management products in different types of transaction structures. The more the cross-legal compliance requirements are, and the more complex they are, the bigger challenge the design of transaction structures of asset management products with more layers will face, and the higher the risks will be.
The industries in which the target assets lie are changing. Some special laws and regulations applicable to the industries, the industrial characteristics, and even the industry practices and regulation practice modes, all bring challenges and risks to the design of transaction structures of asset management products.
In addition, as regulation of asset management is tightened, the transaction structures of some asset management products are exposed to special compliance risks. For example, recognition of the nature of asset management products as provided in the accounting standards will have a major effect on the design of transaction structures, and even the conclusion and sustainability of transactions.
Legal risks at the product management level. In terms of asset-side management of asset management products, the nature of “wealth management for clients” of the products affects the attitude of asset management products and their trustees towards asset-side management to a certain extent. Asset management products and their trustees tend to treat asset-side management with the mindset of a financial investor, and pay more attention to transaction structuring in the pre-transaction structure, and acquisition of necessary information.
In later-stage asset management of some equity investment projects, the management is loose and shallow. In practice, asset management products and their trustees are passive in the acquisition of key information and implementation of other interventions, resulting in risks and lags in tracking and regulation of target assets.
Recommendations on risk control. At the level of laws applicable to the asset management industry, further standardisation and unification of various regulation standards, and the boundary definition standards for asset management products, are recommended in order to mitigate the risk of uncertainty that mature asset management products are exposed to, create space for the compliance of innovative asset management products, and promote the development and mature mode of innovative asset management products.
In the meantime, the author suggests that asset management institutions should timely follow up on the latest changes and adjustments to applicable laws and regulations, and also maintain timely communications with competent regulators.
At the transaction structure compliance level, it is recommended that the effect of laws and regulations, and compliance recognition of different systems on transaction structures, be given serious consideration. Legal compliance systems applicable to different transaction structures should be sorted, transaction structures should be reasonably simplified, and attention should be paid to construction of the connection and cross-relations of different contracts, so as to maintain the stability and compliance of transaction structures.
At the level of asset-side management, stronger post-investment management of target assets is recommended. Starting with external supervision and active internal involvement in actual management, asset management institutions should take all suitable measures, make good use of relevant rights granted by laws and regulations, and even purposefully create certain rights for substantial participation in management of target assets, and mitigate the risks of major changes to target assets.
Sima Yayun is a senior partner at DOCVIT Law Firm.