Banking News

Bank compliance for wealth management subsidiaries


Establishing bank wealth management subsidiaries (BWMS) is an important means for commercial banks to strengthen risk isolation management and implement professional operation, and also an important measure to comply with the general trend of wealth management, effectively implementing requirements of the the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (new asset management rules) issued in 2018 to improve and promote a more stable framework and reduce shadow banking risks in China.

As of June 2022, 29 BWMS have now been approved to be established, including 25 Chinese funded BWMS and four Sino-foreign joint venture BWMS.

SHAREHOLDER QUALIFICATION

When establishing BWMS, the qualifications and business capacities of shareholders, especially initiators and controlling shareholders, are of great concern and strictly examined by regulators.

The Measures for the Administration of Wealth Management Subsidiaries of Commercial Banks emphasise that controlling shareholders should meet the conditions of “good regulatory rating” and “standardised and stable operation of wealth management business”. Specifically, they insist on “no material violation of laws and regulations in the past two years”, or that any rectification has been recognised by the regulator.

The above-mentioned “violation of laws and regulations” generally refers to violating the Law on Regulation of and Supervision over the Banking Industry (Amended in 2006), the Commercial Bank Law, and other laws and administrative regulations.

It also references the new asset management rules, the Measures for the Supervision and Administration of Wealth Management Business of Commercial Banks, and other regulatory provisions, all of which aim to prevent seriously endangering the stable operation of banks or damaging legitimate rights and interests of investors.

In terms of business capacity, the wealth management business of controlling shareholders of BWMS should meet the following requirements: a wealth management business department established to implement centralised and unified management of its wealth management business; a wealth management business department in operation for more than three years with an organisational structure with separate front, middle and back offices, clear responsibilities and effective checks and balances; and a clear development strategy and business plan in place.

During preparation of the establishment and application, these requirements should be truly, comprehensively and completely reflected in relevant application material including the application form, feasibility study report, investor’s description of the basic situation and acceptance of supervision, as well as legal opinion on the legality and compliance of the applicant’s qualification.

CORPORATE GOVERNANCE

Key regulation in the banking and insurance industry aims to improve quality and efficiency of corporate governance, promote scientific and healthy development, strengthen supervision over corporate governance, and regulate the behaviour of major shareholders. In applying for establishment of BWMS, relevant standards in these fields are also prerequisites for approval.

For example, it is prohibited for companies with “obvious defects in corporate governance structure and mechanism” and “numerous affiliates, complicated and opaque equity relations, frequent and abnormal connected transactions” to be shareholders of BWMS.

To avoid problems such as over-complicated structure, connected transactions or conflicts of interest, the number of BWMS in which the same investor, its affiliates and concerted actors hold shares should not exceed two, while the number of BWMS in which they control shares should not exceed one. This is commonly known as the “shareholding in two and share-controlling in one” restriction.

As for regulation over major shareholders’ behaviour, in addition to implementing relevant requirements of the Measures for the Administration of Wealth Management Subsidiaries of Commercial Banks, the establishment of BWMS should also comply with relevant provisions of the Guidelines on Corporate Governance of Banking and Insurance Institutions, and the Measures for the Regulation of the Behaviour of Major Shareholders of Banking and Insurance Institutions (for Trial Implementation).

In particular, the parent bank (as the initiator and controlling shareholder) is required to properly exercise shareholders’ rights through corporate governance procedures to safeguard independent operation of BWMS. Unless otherwise provided by laws and regulations, it is strictly forbidden to improperly intervene in or restrict the operation of BWMS in certain ways.

These include: setting up procedural prerequisite for approval of resolutions of the shareholders’ meeting and the board of directors; intervening in normal hiring procedures of staff, or directly appointing or removing staff without authorisation from the shareholders’ meeting and board of directors; intervening in performance evaluation of directors, supervisors and other staff; intervening in normal business decision-making procedures; intervening in financial and accounting activities such as financial accounting, fund mobilisation, asset management and expense management; and issuing business plans or instructions to BWMS.

Therefore, in the application material, the draft articles of association, capital contribution agreement, description of investor affiliates, the statement and commitment by legal representative of the investor, and other documents should fully cover and implement the above-mentioned regulatory requirements.

APPLICATION PROCESS

According to the current regulatory approval process, the establishment of BWMS is divided into two stages – preparation and opening – and the work contents of these two stages are different.

From the perspective of regulatory review, the establishment work in the application and preparation stage should be mainly considered from the overall setting up of BWMS, especially the demonstration on necessity and feasibility, as well as consolidating the qualifications of investors, promoters and shareholders.

At the stage of application for business opening, the related work should mainly focus on all-round business opening preparations by the preparatory organisation. These include business guidelines and plans, organisational structure, division of labour among departments, qualifications of directors and officers, employees and their working experience, information system construction and office premises arrangement, etc., as well as the institutional construction of corporate governance, business management, risk management, internal control and comprehensive management.

As for timing, the regulator will make a written decision on whether to approve the establishment within four months of receiving application materials for establishment of BWMS, and six months from the date of approval will be the “preparation period”. Within two months from accepting application materials for business opening, the regulator will make a written decision on whether to approve, while BWMS should start business within six months from obtaining the business licence.

At both stages, it is possible to apply for an extension, but it is necessary to submit an extension report to the regulator one month before the expiration of the time limit. Otherwise, the approval documents will become invalid and the licence will be cancelled.


Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at howard.wu@bakermckenzie.com





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