Chinese Banks Step up Client Risk Scrutiny Following Launch of New Asset Management Rules


Chinese banks are intensifying their monitoring of the risk bearing capacity of clients following the launch of new asset management regulations that target the moral hazard associated with implicit guarantees.

On 27 April Beijing officially launched the “Guidance Opinions Concerning Standardisation of Asset Management Operations by Financial Institutions” (关于规范金融机构资产管理业务的指导意见), which was expected to cause a major shake-up of China’s financial sector by removing the implicit guarantees undergirding investment vehicles such as wealth management products (WMPs).

A new report from Securities Daily indicates that the rules have already prompted frontline banking staff to step up their assessments of the risk bearing capacity of clients.

The “Commercial Bank Wealth Management Product Sales Administrative Measures” (商业银行理财产品销售管理办法) stipulates that prior to the initial purchase of WMP’s by customers, branches of commercial banks should conduct assessments of the risk bearing capacity.

These assessments should at the very least encompass the age, financial state, investment experience, investment goals, return expectations, risk preferences, liquidity needs, risk understanding and ability to bear losses of clients.

Banks are also required to conduct categorisation of WMP’s on the basis of risk, before matching them to appropriate clients.

Chinese banks have been lax about risk assessments in the past, however, with some WMP managers even advising clients to fill in or change their own risk reports themselves.

This was because of  the implicit guarantees that the products were presumed to enjoy, which meant that risk bearing capacity became a moot point.

The removal of implicit guarantees by the new asset management regulations has now made assessment of the risk bearing capacity of clients imperative.

“In future bank WMP’s cannot guarantee principal or interest, and investors must choose whether or not to bear risk in relation to products based on the product information and their own actual circumstances,” said one WMP manager to Securities Daily.

“In the past investors who purchased WMP’s felt that they were undoubtedly safe, as the bank would always dip into its own pockets.

“For this reason, risk assessments as well as dual recording were quite overlooked. Since the release of the new asset management rules, investors must bear risk themselves, purchasers are responsible for themselves, and many investors have no choice but to take notice.”

The WMP managers of many Chinese banks are now requiring assessments of risk bearing capacity prior to the first-time purchases of clients, as well as re-assessments for clients who have not undergone assessment in the past year, or who are in circumstances which could have a material impact on their ability to bear risk.

“Clients can only purchase WMP’s that correspond to their risk assessment results,” said one WMP manager at a state-owned Chinese bank.

“Unless the client himself actively demand the purchase of WMP’s in excess of his risk bearing capacity, we will actively recommend the purchase of low-risk WMP’s – especially to older clients.”

Another key risk-prevention measure that has risen to the fore following the launch of the new asset management rules is the dual recording system (双录) for banks.

The “Banking Sector Financial Institution Special Sales Area Audio-visual Recording Provisional Administrative Regulations” (银行业金融机构销售专区录音录像管理暂行规定) were launched on 20 October 2017, and require that banks install both audio and visual recording equipment in special sales areas in order to record the process of WMP sales.

Banks are prohibited from conducting sales activities for these products outside these areas, although clients can conduct independent purchases via some ATM’s.

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