A Study on the Setting up of Wealth Management Subsidiaries of Commercial Banks
Issue 1: China's Asset Management Market Set For a New Landscape with the Rise of Wealth Management Subsidiaries
With the promulgation of a series of supervisory regulations including the Guidance on Regulating Asset Management Business of Financial Institutions (hereinafter referred to as the "Asset Management Guidance"), the Rules on Wealth Management Business of Commercial Banks (hereinafter referred to as the " Wealth Management Rules"), the Rules on Wealth Management Subsidiaries of Commercial Banks" (hereinafter referred to as the "Wealth Management Subsidiaries Rules") in the second half of 2018, bank-based asset management, which dominates China's asset management market, has officially entered the era of independent subsidiary operation. This also means that banks' wealth management business has reverted to how it originated, which is managing assets for clients, and China's asset management market is entering a new phase of development to become more normalized, standardized, internationalized and structured.
As of 27 June 2019, a total of 31 banks, including the five largest banks, already announced plans to set up wealth management subsidiaries, nine of which have obtained approval for setup. Wealth management subsidiaries of banks are gradually marching into China's asset management market. It is a golden opportunity for application for setting up subsidiaries. With the rise of wealth management subsidiaries, China's asset management market is all set for a new landscape.
To help commercial banks tackle the challenges during transformation period, Deloitte China FSI team will address the issues faced in the setting up of wealth management subsidiaries through special studies on 10 topics covering transition planning, tax planning, risk management system building, IT system building, internal control system, legal considerations, financial accounting, and data governance and application. Qualified commercial banks should follow the trend of the financial reform in China and transform their asset management business as early as possible by leveraging the regulatory timeframe to drive preparations steadily and effectively.
I. Strengths of the license
The license for bank-based wealth management subsidiaries is a comprehensive asset management business license issued by the China Banking and Insurance Regulatory Commission (CBIRC). As stipulated by the Measures for the Administration of Wealth Management Subsidiaries of Commercial Banks, the license covers public offering, private offering, wealth management advisory and consulting services. Compared to the asset management licenses issued by other regulatory bodies, it has a wider scope of businesses and investments.
Comparison of major asset management licenses
|Wealth management subsidiary of banks||Public fund management company||Private fund management company||Fund subsidiary||Asset management of securities companies||Private fund subsidiary of securities companies||Insurance asset management||Trust company|
|Registered capital||RMB1 billion||RMB100 million||RMB10 million||-||-||-||RMB30 million||RMB300 million|
|Regulatory capital||Net regulatory capital, risk reserve||Risk reserve||Risk reserve||Risk reserve||Net regulatory capital||Combined with parent||Net capital management||Net capital management
Trust compensation reserve
|Scope of business||Public offering, private offering, consulting||Public offering||Private offering||Specific client asset management, fund sale, private offering||Collective, directional, and special assets management plans||Private offering, self-own idle asset management||Entrusted insurance asset management||Private offering
|Minimum sales||Nil||Nil||RMB1 million||-||-||-||-||RMB10 thousand|
|Regulatory basis||Measures for the Administration of Wealth Management Subsidiaries of Commercial Banks||Measures for the Administration of Securities Investment Fund Management Companies, Measures for the Administration of Fund Companies||Interim Measures for the Supervision and Administration of Private Investment Funds||Provisions on the Administration of Subsidiaries of Fund Management Companies
||Regulations on the Administration of Private Fund Subsidiaries of Securities Companies||Interim Provisions on Insurance Asset Management Companies||Measures for the Administration of Trust Companies|
Overall speaking, the license for bank-based wealth management subsidiaries are significantly more competitive than other asset management licenses.
- Sale of products: Under the relevant requirements of the Measures for the Administration of Wealth Management Subsidiaries, sale of publicly offered wealth management products (WMPs) of wealth management subsidiaries is not subject to minimum sales amount. There should be extensive sales channels, and individuals purchasing WMPs for the first time are not required to sign in person at bank counters.
- Product R&D: Bank-based wealth management subsidiaries may issue publicly and privately offered products, set up structured products, and offer investment advisory services.
- Investment operation: In addition to investing in stocks, money market instruments, and fixed-income, commercial and derivative instruments, banks' WMPs are also allowed to invest in unlisted equity and other debts, and in non-standard assets at a limit of up to 35% of the net assets of the WMPs.
- Range of wealth management partner institutions: Consistent with the New Provisions on Asset Management, the issuers and investment trustee companies of the asset management products invested by the publicly offered WMPs issued by wealth management subsidiaries must only be licensed financial institutions. However, the partner institutions for privately offered WMPs and investment advisors of publicly offered WMPs can either be licensed financial institutions or legally-compliant and qualified private fund managers.
For commercial banks, obtaining this comprehensive and competitive asset management business license serves not only as a business opportunity for standardized operation of own wealth management business, but also a valuable opportunity for the building of the wealth management brand and platform for banks.
II. Current state analysis of wealth management subsidiaries already in operation
As a shareholder of a wealth management subsidiary of a commercial bank, a domestic or overseas financial institution must contribute its own capital for shares, and shall not contribute capital not owned by it, such as debt funds and entrusted capital, for shares. It shall pay a lump sum of, at a minimum, RMB1 billion, as registered capital. In addition, the supervisory body also requires that commercial banks meet other relevant business qualifications prescribed in the Measures for the Administration of Wealth Management Subsidiaries.
Overview of approved wealth management subsidiaries
|Controlling shareholder||Name of wealth management subsidiary||Balance of stock asset
(in RMB100 million)
(in RMB100 million)
|Date of approval for setup||Place of registration||Date of approval for business commencement||Date of business commencement|
|ICBC||ICBC Wealth Management Co. Ltd||30000||160||2019.2.15||Beijing||2019.5.22||2019.6.6|
|CCB||CCB Wealth Management Co. Ltd||19400||150||2018.12.26||Shenzhen||2019.5.22||2019.6.3|
|Agricultural Bank of China (ABC)||ABC Wealth Management Co. Ltd||18400||120||2019.1.4||Beijing||Pending approval||-|
|BOC||BOC Wealth Management Co. Ltd||15991||100||2018.12.26||Beijing||2019.6.27||-|
|BOCOM||BOCOM Asset Management Co. Ltd||7696||80||
|PSBC||PSBC Wealth Management Co. Ltd||7840||80||2019.5.29||Beijing||Setting up in progress||-|
|CMB||CMB Wealth Management Co. Ltd||13000||50||2019.4.18||Shenzhen||Setting up in progress||-|
|CEB||CEB Wealth Management Co. Ltd||19600||50||2019.4.18||Beijing||Setting up in progress||-|
|CIB||CIB Wealth Management Co. Ltd||18200||50||2019.6.14||Shanghai||Setting up in progress||-|
According to the New Provisions on Asset Management and their supporting rules, all WMPs will be converted into net value products, which will be mainly classified into fixed-income products, equity products, commercial and financial derivatives products, and mixed products, after 2020. The transition period is from 27 April 2018 to 31 December 2020. From the products of the three bank-based wealth management subsidiaries already in operation, it can been seen that the asset allocation by type is still dominated by fixed-income and cash management products, with equity and index products being the supporting lines. As equity investment research capabilities of wealth management subsidiaries improve, the portion of equity assets will likely increase gradually in the future.
III. Key points on license application and setup stages
In the license application and setup stages of wealth management subsidiaries, commercial banks should fully consider the place of registration, organizational structure, use limit of registered capital and its impact on capital adequacy ratio of the parent, as well as the relevant qualifications required for business commencement, and perform analysis and develop applicable plans based on the banks' own situations.
➤Place of registration
In selecting the place of registration for a wealth management subsidiary, considerations would normally be based on whether the local policies are supportive, whether it is convenient for business commencement, whether it attracts talents, and whether it is convenient to communicate with the parent. Meanwhile, the place of registration should also align with the overall strategy plan of the parent.
➤ The "coopetitive" and "win-win" relationships among the group ecosystem
When applying for wealth management subsidiary licenses, commercial banks with multiple subsidiary licenses may carry out business planning and product planning fully to form favorable coopetitive relationships among entities in the group ecosystem and create a virtuous group ecosystem together.
- Fund companies: On top of the advantages of wealth management subsidiaries, the products to be offered by wealth management subsidiaries will mainly be cash management products and fixed-income products. Other than standard assets, they may also focus on non-standard debts assets to cover primary market investments. Public fund companies are stronger in equity investments, which may concentrate on developing active equity products in order to cover secondary market investments. Public fund companies within the group may share asset managers and investment research capabilities output with wealth management subsidiaries.
- Trust companies: Banks' wealth management subsidiaries are unable to invest in credit assets directly or carry out lease business. There is still room for cooperation between wealth management subsidiaries and trust companies in the fund custody business.
- Insurance companies: The funds of insurance institutions are mainly entrusted to banks, engaged in large-denomination time deposits with banks, and subscription of banks' WMPs. In the future, the insurance asset management business may also strengthen cooperation with the long-term asset management, equity investment management, asset allocation, and pension segments.
- Securities companies: Asset management of securities companies may serve as the promoter of the products of wealth management subsidiaries. With stronger active management capabilities, asset management of securities companies may also provide equity product outsourcing or investment advisory services for wealth management subsidiaries.
➤ Design of organizational structure
As independent legal entities, wealth management subsidiaries of banks have independent operation decision-making power, resource allocation power, staff recruitment power, and independent appraisal and incentive mechanisms. Clarifying the organizational structure required to achieve independent operation and completing the talent structure by filling up vacant positions are key issues to be addressed by banks in the early stage of subsidiary setup.
➤Use of registered capital and impact analysis
According to the relevant provisions of the Measures for the Administration of Wealth Management Subsidiaries, wealth management subsidiaries of banks may use their own capital to engage in interbank placement or interbank lending, bond investment, other fixed-income securities, as well as other assets approved by the supervisory body for the banking industry under the State Council.
Meanwhile, banks should be aware of the impact of the registered capital of the wealth management subsidiaries on the capital adequacy ratio of the parent. When calculating the capital adequacy ratio at parent level, the capital contribution of wealth management subsidiaries will be deducted from the core capital as "Core Tier 1 capital investment of financial institutions that are under control but not subject to consolidation" under "Core capital deductions". This will reduce the bank's pre-consolidated capital adequacy ratio to a certain extent in the term short.
➤Business commencement qualification of wealth management subsidiaries
Asset management qualifications currently highly relevant to the wealth management business include: derivatives qualification, qualification for foreign exchange business, QDII qualification, and qualification for best efforts underwriting of funds. Being independent legal entities, wealth management subsidiaries in principles are required to undergo application and filing procedures again to obtain business commencement qualification. Wealth management subsidiaries may prepare for the relevant qualifications applications during the setting up stage. Among the three wealth management subsidiaries which have obtained approval for business commencement, ICBC Wealth Management Co. Ltd is qualified for carrying out general derivatives trading business and foreign exchange business.
To capture the asset management market, it is an important step for commercial banks to seize the golden period for application of license for wealth management subsidiaries in order to obtain qualifications for setup as early as possible. Leveraging the strong client base and extensive outlet network of the parent bank, wealth management subsidiaries should be able to fully tap into the strengths of the license, accurately identify the current client base and future client targets, and develop comprehensive client operating strategy to better cater to clients' investment needs. They may build market-oriented competitiveness, and deepen management of online and offline channels to respond to the opportunities and challenges in channel cooperation. They should devote efforts in developing core products and expanding product types by leveraging their own strengths in investment. Meanwhile, commercial banks need to establish a basis for compliant operation and asset allocation for wealth management subsidiaries, and keep track of regulatory movements to develop management systems and operation models in compliance with regulatory requirements. Building flexible and advanced IT capabilities and utilizing technologies including AI, big data, block chain, API, and natural language processing will also speed up progress in client acquisition, precise marketing, sales, compliance, risk management and intelligent investment advisory.