Wealth management refers to a type of financial analysis, financial planning and management service that banks provide to high net worth individuals. Banks have the obligation to return certain profit by managing customers' funds in an agreed period of time.
The history of wealth management in China’s financial industry can be dated back to 2005, when China Construction Bank issued what can be seen as China’s first RMB wealth management product (WMP) in China. In the same year, the China Banking Regulatory Commission (CBRC) released two sets of regulations entitled ‘Interim Measures for the Administration of Commercial Banks' Personal Financial Management Services’ and ‘Guidelines for the Risk Management of Personal Financial Management Services Provided by Commercial Banks’.
Both regulations defined the types, policies, risk management, and supervisory regulations for WMPs in China. Since then, Chinese banks have issued more and more WMPs each year (Figure 1). At the end of 2012, 31,550 WMPs have been created and reached maturity. These matured products realized a 246.4 billion yuan return representing a 4.11% average annual yield for customers. This strong WMP return has brought significant profits for both banks and bank customers, more recently however, bank customers who have invested in WMP have seen the potential downside of the relatively new wealth management industry.
Figure 1. Number of Wealth Management Products Source: Benefit, Kapronasia Analysis 2013
Shadow of Wealth Management Business in Chinese Banks
Previously, most WMP had a positive return and were generally seen to be solid investment products. In 2012 however, there many cases of WMP fraud cases came to light in a number of Chinese banks including CITIC Bank, China Construction Bank, Huaxia Bank, and Industrial and Commercial Bank of China. For instance, CITIC Bank Zhengzhou Branch packaged and sold millions of yuan of a WMP which was actually based on low-quality loans, many of which actually failed, rendering the original WMP nearly worthless; CITIC Bank still owes nearly 40 million yuan to its customers.
The CITIC case is not unique and there has been a noticeable rise in the number of fraud cases related to the wealth management business in the last couple of years; it is the responsibility of the regulators and banks themselves to monitor the industry to ensure fraud does not continue to rise.
Recommendations for Wealth Management in Chinese Banks
To decrease or prevent the growing trend of wealth management fraud cases, bank customers should notice the type of the WMP they purchase, and the risk level stated in the contract. There are two type of WMPs, one belongs to the bank, and the other is a bank consignment product where the product is actually developed by a 3rd party. Compared with bank consignment product, WMP issued by banks themselves are typically less risky. Chinese customers are many times under the impression that WMPs are safe, but the reality is that any investment involves risks. Customers should be aware the risk before they invest money into WMPs.
On the other hand, regulators need to introduce and apply strict and clear rules on WMP information disclosure to protect bank customers. Shanghai CBRC has committed to introduce actual video recording for any sales activities related to WMP before 2014. The video will act as evidence if the bank cannot return the promised principal and profit back to customers – on one hand illustrating any potential mis-information from the banks themselves and on the other, showing that the customer understood what they were buying.
Chinese banks also need to be responsible for internal controls to prevent bank employees from selling WMPs by themselves on behalf of the bank without the bank’s knowledge. Further, it is necessary for banks to consider who and how to compensate the losses if the banks is not able to repay funds back to customers. An example of this issue is the recent case in Huaxia Bank, where a former employee sold wealth management products without the bank’s permission; in this case, it is still the bank’s responsibility to manage the operational risk and ensure that it is aware of any staff actions.
Finally, for a healthy growing business in the long run, Chinese banks need to provide more high quality WMPs instead of high quantity WMPs. The banks themselves can accomplish this, but the involvement of regulators can also help to advance the quality and limit the quantity of WMPs in the coming years.