LawFlash

Chinese Authorities Appear to Increase Scrutiny on Marketing of Offshore Wealth Management Products

October 22, 2018

Under recent Chinese banking regulations, which include the increased regulation of asset and wealth management products, licensed commercial banks must have prior approval and licensing to engage in the marketing and sale of wealth management products, both onshore and offshore. In light of the recent possible detainment of a commercial banker in Beijing, financial institutions that market and sell offshore financial products in China should consider closely monitoring these increased regulations.

Amid China’s increased regulation of the wealth management industry, a female relationship manager based in the Singapore office of a large Swiss bank was recently prevented from boarding an outbound flight in Beijing. The relationship manager, reportedly a member of the bank’s China wealth management team, allegedly may have violated stringent Chinese onshore regulations on licensing and compliance requirements for the marketing and sale of offshore wealth management products. Some media outlets have reported that the Chinese authorities had detained the banker on grounds of illegally soliciting business. Other reports have suggested that the banker was not detained, but was denied a boarding pass upon check-in and instead instructed to meet with local authorities in another Chinese city prior to leaving the country. According to this report, the banker has been allowed to move freely within Beijing and intends to meet with the authorities this week. In response to the incident, the Swiss bank has reportedly issued orders limiting its employees’ travel to China.

Although the specific reasons for the relationship manager’s detention remain unclear, since April 2018, the People’s Bank of China, the China Banking and Insurance Regulatory Commission (CBIRC), the China Securities Regulatory Commission, and the State Administration of Foreign Exchange have promulgated a series of strict regulations on the wealth management industry that are applicable to both domestic and foreign-invested commercial banks as well as Chinese branch locations of foreign banks. These regulations constitute a critical part of China’s 2018 campaign to deleverage the financial sector. In addition, Chinese financial and foreign exchange regulators have been closely monitoring noncompliant capital outflow.

Under the new Chinese banking regulations, asset management and wealth management products, including those related to offshore wealth management on behalf of domestic clients, are subject to increased regulation. Licensed commercial banks, including domestic banks, foreign-invested banks, and local branches of foreign banks, must have prior CBIRC approval and licensing to engage in onshore and offshore asset management and wealth management, including the marketing and sale of wealth management products.

Even if approval and licensing is granted to a foreign bank’s domestic affiliates or branch offices, such approvals may not be applicable to the bank’s employees and representatives in other jurisdictions. The marketing and sale of wealth management products within China may technically violate China’s banking regulations if performed outside the scope of CBIRC approval. Furthermore, such activities would also run afoul of regulators if they involved advising wealthy Chinese investors on the repatriation of investment funds offshore in violation of applicable foreign exchange regulations.

The incident has reportedly caused at least one other investment bank to bar its relationship managers from traveling to China. Similar financial institutions, especially those currently marketing and selling offshore financial products in China or that have plans to do so, are well advised to closely monitor the government’s increased scrutiny on marketing and sales of offshore wealth management products.

We are well positioned to provide assistance. Our China team can provide compliance advice with respect to marketing and sales models for financial products in China, as well as analysis of regulatory requirements and trends in banking and foreign exchange regulations. We can also provide assistance in formulating responses to government inquiries and interview requests.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Beijing
K. Lesli Ligorner

Boston
Carl A. Valenstein
Timothy P. Burke

Chicago
Tinos Diamantatos

Hong Kong
Charles Mo

London
Chris Warren-Smith

Miami
Alison Tanchyk

Moscow
Vasilisa Strizh

New York
Kelly A. Moore
Martha B. Stolley

Philadelphia
Nathan J. Andrisani
Meredith S. Auten
John C. Dodds
Lisa C. Dykstra
Rebecca J. Hillyer
Eric Kraeutler
Ryan McCarthy
Jami Wintz McKeon, Chair
Zane David Memeger
John J. Pease, III
Eric W. Sitarchuk 

Shanghai
Todd Liao

Washington, DC
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Ivan P. Harris