A major fraud scandal in Beijing has highlighted inadequacy of risk controls in China’s banking sector when it comes to the multi-trillion yuan wealth management products market.
After first making their debut in 2004, wealth management products have seen skyrocketing growth in China to create a market worth 29.1 trillion yuan by the end of the first quarter.
The investment products have enjoyed remarkable growth on the back of the commonplace expectation amongst consumers that banks will always make payments on these products.
The instruments are source of major concern for regulators, given that banks can use them to conceal risky lending and further contribute to China’s burgeoning shadow banking sector.
Inadequate regulation and management of China’s wealth management products has been highlighted by a recent scandal involving a Beijing branch of China Minsheng Bank.
Ms Zhang Ying, head of China Minsheng’s Hangtianqiao branch in Beijing, is alleged to have defrauded over 150 of its high net-worth private banking clients of as much as 3 billion yuan (approx. USD$440 million) by means of counterfeit wealth management products that were subsequently discovered by Minsheng itself to be counterfeits with phony serial numbers.
China Minsheng conceded itself to the weakness of its internal controls in the wake of the scandal
“There are gaps in the internal control mechanisms and internal control management of individual base level entities,” said China Minsheng in an official statement released on 27 April.
“Individuals have breached regulations and engaged in non-compliant operations, and the daily operations inspection capability and frequency of branch banks is insufficient; branch banks have not properly regulated the conduct of staff, and daily regulation is still unable to perform its proper function of [risk] prevention and restraint.”
Weak wealth product risk controls widespread amongst banks
China Minsheng is far from the only bank where weak risk controls have failed to prevent branch employees from using wealth management products to defraud customers.
The first major case involving the use of wealth management products to fleece clients made headlines at the end of 2012, when an employee of the Shanghai branch of Huaxia Bank raised 119 million yuan using phoney wealth management products.
21 Century Herald reports that 11 high-net worth clients of a joint-stock bank in southern China were recently defrauded of nearly 100 million yuan, with victims already filing lawsuits against the branch.
In Tianjin municipality the local banking regulator issued administrative fines and warnings on 8 February to staff at the Tianjin branch of Ping’an Bank for a case involving the illicit sale of wealth management products that were not actually provided by the bank itself.
Regulators respond with heavy handed measures
Shortly after news broke of the China Minsheng Scandal, Guo Shuqing, the recently appointed head of China’s banking regulator, called for the standardisation of wealth management product sales operations, and full disclosure of product information and risk during the sales process, as well as the strict implementation of audio-visual recording of sales processes.
At the end of March CBRC issued directive 45, calling for inspection of the implementation of audio-visual recording by banks when conducting sales operations, as part of efforts to prevent fraudulent or misleading conduct by bank personnel.