Hong Kong, China Framework Comparison – Investment Suitability

Synpulse’s Prasanna Venkatesan, Gregory Achache and Marina Mai compare the investment suitability frameworks of Hong Kong and mainland China, and their pain points.

As China opens up its banking sector to foreign players at an unprecedented rate, many international banks — especially those that already have a strong presence in Hong Kong, and have shown a keen interest in exploring the Mainland China market. In a series of three articles, we will examine the regulatory differences between Hong Kong and Mainland China, as well as the challenges of complying in a dynamic regulatory environment.

Background

In 2018, regulators in both Hong Kong (HKMA, SFC) and Mainland China (PBOC, CBIRC, CSRC) continued to enhance and enforce the regulatory requirements of investment suitability to ensure that financial institutions have robust processes and controls in place. The purpose was to protect customers’ interests and to avoid mis-selling of products, as part of ongoing efforts to strengthen their regulatory frameworks.

With the guidelines and notices issued to date, enhancement of the suitability framework will continue to be a key regulatory focus in the coming year. In this article, we provide a brief introduction on the investment suitability framework in Mainland China, a holistic comparison of suitability requirements between China and Hong Kong, and the pain points observed by industry insiders.

China’s investment suitability framework

The Guiding Opinions on Regulating the Asset Management Business of Financial Institutions in April 2018, jointly published by PBOC, CBIRC, CSRC, and SAFE, Chinese regulators showed a determination to push forward reform in the domestic financial market. The key task of such reforms were to raise the risk-awareness of traditional depositors when they start investing in financial products.

The current status of China’s financial market can be characterized by: 1) the rapid growth in wealth, 2) the proliferation of products/services/distribution channels offered by traditional and non-traditional financial services providers and 3) a less sophisticated regulated environment.

The private banking sector and wealth management business are developing. However, the gap to match up with international players is still large. As part of the regulatory effort to bridge the gap, two influential pieces of regulation, the Guiding Opinions and the CBIRC Guidance of Supervision on Wealth Management Business of Commercial Banks were issued in 2018, which provided clearer guidelines on the valuation of investment products, mitigation of concentration risk, detailed requirements for pre-trade information disclosure, and the use of artificial intelligence and robo advisory.

This reflects the drive of regulators to enhance the risk-aware culture as China’s market continues to mature.

Comparison Matrix

Generally speaking, compared to Hong Kong, Mainland China continues to lag in terms of regulatory sophistication. This gap is beneficial for banks already operating under a stricter regulatory environment. Such is the case with Hong Kong. By leveraging on hands-on experience in Hong Kong, banks will have a competitive edge when it comes to the opening up the greater market in Mainland China.

Based on a comparison of the key components of the suitability framework , which showcases the level of maturity of regulatory requirements in both Hong Kong and Mainland China (Figure 1), we will discuss the three most important items in detail.

Figure 1: Level of maturity of regulatory requirements

Categories of Investors

The category of “Qualified Investor” was established in Mainland China under 2018 guidelines issued by PBOC. By contrast, Hong Kong regulators had already established a well-adopted mechanism for dealing sophisticated investors – under the Professional Investors (PI) and Corporate Professional Investors (CPI) framework.

Moreover, Hong Kong regulators set out specific criteria to define a “vulnerable client” – for the purposes of investor protection – a few years ago. In the Mainland, however, the line between general investors and vulnerable investors is still blurred.

KYC Policies

With regard to client identification, there are multiple notices that have been issued in Mainland China. Two of these were issued in 2018: the Notice on Strengthening the Client Identification and the Notice on Conducting Identification of Beneficial Owners.

To date, KYC has been a topic with the clearest requirements from Chinese regulators. However, Hong Kong still has more customer segments defined due to the smaller cluster of customer segments specified by HKMA and SFC.

Information Disclosure

A well-established system is in place in Hong Kong, specifying the content of disclosure, the time and frequency of disclosure as well as what needs to be disclosed. Meanwhile in Mainland China, banks are mainly required to avoid exaggerated language in their marketing materials and misleading words by their relationship managers during the pre-sales phase.

Industry Pain Points

For banks that are venturing into the Mainland China market, we observe what we believe are key pain points, resulting from regulator factors, as summarised in Figure 2 below.

Figure 2: Key pain points and the reasons behind them

Conclusion

As summarised in Figure 3 below, we note that the key requirements for investment suitability are more comprehensive and stricter in Hong Kong than Mainland China.

By identifying and understanding the current and future state of regulatory environment for investment suitability, financial services firms are better able to implement an appropriate forward-looking framework that supports business growth.

Figure 3: Holistic View on the suitability frameworks in China and Hong Kong

Prasanna Venkatesan is a Partner and Lead Regulatory Compliance & Risk Competence Centre APAC; Gregory Achache is a Manager & Lead Regulatory Compliance & Risk Competence Centre Hong Kong; and Marina Mai is a consultant at Synpulse Management Consulting.

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