Source: finance.qq

Under the asset-management background of nearly 30 trillion yuan of bank wealth management product, how to accurately define the nature of bank financial products and clarify the legal relationship has long been the controversy in the supervision of wealth management products.

How to guard against wealth management market risk, represented by bank wealth management products? Wu Xiaoling gives her suggestions in three directions, being, unifying understanding, perfecting laws, and setting standards.

First, unified understanding is the precondition of law making and law revision.

Wealth management conducted by third party organizations is trust, in terms of legal relation. Asset managers generally take the form of pooled capital investment when conducting monetary asset management, the form of such pooled capital investment is trust, in terms of legal relation. However, financial investment products are securities in nature. The biggest controversy in the current asset management market is how to confirm the legal relation of bank financial products. At present, among nearly 100 trillion yuan of wealth management products, banks have about 30 trillion yuan, accounting for more than 30%. Wu Xiaoling believes that the elements of distinguishing the nature of financial products should start with the risk taking mode and income distribution mode.

The investment scheme for pooled capital has four characteristics, the first is to raise funds by shares; the second is to be managed and invested by third parties for the benefit of the clients; the third is to let investors take risks and enjoy benefits; the fourth is to let managers collect management fees. For partnership based private equity funds, part of the profits can be shared by contract.

Collective investment schemes are recognized by the countries of the world as securities. For bank deposits, banks bear the risk of profits and losses, while investors (depositors) enjoy a fixed income. For wealth management products with no guaranteed principal yet with guaranteed expected return, Wu Xiaoling insists that such products should be a collective investment scheme. However, if such products are in the red, banks will also make “rigid payment” from the overall profits, so as to achieve the expected earnings. Once the products exceed the expected earnings, banks will also include the part exceeding the expected earnings into their own income statement, as their own profits. The bank’s logic is that when there are losses, the bank pays for losses, so then, the part beyond expected earnings should belong to the bank.

In Wu Xiaoling’s opinion, for bank wealth management products without principal guaranteed, all the proceeds should go to the clients; banks should only charge management fees. “The key to the guidance of the wealth management market for such rigid payment, and the confusion about the nature of the products, lies in these type of bank wealth management products, featuring no guaranteed principal yet with guaranteed expected return.”

At present, unfair competition exists among different asset management products; the root lies in different understanding of the nature of the products. Banks have called for the same legal status between bank wealth management products and trust & securities products in the capital market, so that they don’t have to bypass trust and securities products. While Wu Xiaoling believes that, to gain open and equal legal status, the key is to identify it as a collective investment product. With a license for securities management, it has legal status.

Second, the legal system must be perfected to lay the foundation for regulatory and behavior norms

The first step is to amend the Trust Law. Trust business must be given an independent chapter, and the legal status of property registration must be clarified to counter the bona fides third party.

Second: is to define collective investment schemes as securities, for incorporation into the adjustment range of the Securities Law, and develop information disclosure requirements and transaction rules according to public/private offering and trading.

Third: is to revise the Securities Investment Fund Act as the Investment Fund Act, which will help meet the needs of multi-level financing of the market. The investment scope of public offering is prescribed by law and that of non-public offering is agreed by contract. The existence of bank wealth management products has its rationality, it adapts to the demand of non-qualified investors with higher risk appetite. Wu Xiaoling believes that banks are now assessing the value of non-standard products by the historical cost method, and they should develop valuation standards for funds accordingly and make some adjustments in this regard. When the control is lifted at the asset side, the threshold for investors should be appropriately raised, a reasonable core of bank wealth management products must be absorbed, and appropriate adjustments must be made to our laws, based on a unified understanding of the legal nature and product nature of bank wealth management products.

Third, standards must be set to regulate wealth management business.

The asset management market is a market with human capital as the core, thus it’s very important to set qualification standards and behavioral criteria for asset managers. Standardization of personal financial planners and corporate financial advisers calls for specified service process, professional ability, and professional ethics. In addition to holding relevant licenses, all kinds of financial institutions or independent asset management institutions must also be equipped with practitioners with corresponding qualifications when engaged in the asset management business. Only when progress has been made in license management and the qualification management of practitioners, can the wealth management market become more standardized and see healthier development.

(The author Wu Xiaoling is a member of the Academic Committee of Shanghai Academy, and former Vice President of the People’s Bank of China)