The China Securities Regulatory Commission (“CSRC”) and the China Insurance Regulatory Commission (“CIRC”) have jointly issued Pilot Measures on the Establishment of Fund Management Companies by Insurance Institutions (the “Measures”) effective as of June 18, 2013. Previously, insurance institutions were not permitted to sponsor or be major shareholders in fund management companies. The Measures now allow insurance institutions to establish or acquire fund management companies.
1. Eligible Insurance Institutions
All insurance companies, insurance group (holding) companies, insurance asset management companies and other insurance institutions within China (collectively, “insurers”) are now allowed to apply to establish or acquire fund management companies in China. (But see Section 5 below).
2. Double Supervision System
The establishment or acquisition of a fund management company by an insurer is subject to review and examination by both CIRC and CSRC. CIRC is responsible for determining whether the insurer is qualified to establish or acquire a fund management company from an insurance capital risk management perspective. CSRC is responsible for approving the establishment or acquisition of a fund management company by the insurer based on criteria outlined in the rules generally applicable to PRC fund management companies. An applicant must clear the approval procedure with CIRC before it can submit its application to CSRC.
The on-going supervision and regulation of insurers’ fund management companies will continue to be the joint responsibility of CIRC and CSRC under a combination of existing and yet-to-be issued regulations.
3. Risk Control and Segregation
Insurers and their fund management companies are required to establish systems to segregate risks, funds, businesses, venues, management staffs, books and records, information, etc., and they are prohibited from conducting affiliated transactions on a non-arm’s-length basis in financial markets (e.g. stock exchanges, the National Inter-Bank Bond Market). CIRC and CSRC will issue a separate rule governing affiliated transactions between insurers and their fund management companies.
4. Consolidated Supervision
According to the Measures, CIRC will adopt “consolidated supervision” over insurers who have fund management companies. “Consolidated supervision” generally means an approach to evaluate the strengths and risks of a group regardless of whether the risks are booked at the parent or subsidiary level. The Measures do not provide any details regarding how “consolidated supervision” will be applied in practice. The details are expected to be set forth in regulations to be formulated by CIRC. We note that the “consolidated supervision” approach is consistent with CIRC’s position reflected in other recently issued policies and regulations (e.g. Outline of “Twelfth five-year” Plan for China Insurance Industry Development).
5. Pilot Program
The Measures indicate that CSRC and CIRC will jointly select the initial insurance institutions to participate in this pilot program. It is unclear whether an insurer that is not selected can nonetheless apply to participate in the program at this stage.
The Measures respond to the request of insurers to be permitted to further diversify their insurance capital investments by developing their own fund management businesses. The Measures also further evidence the trend of China’s regulators to give financial institutions more scope to participate in a wider range of sectors within the finance industry.
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This article was originally published by Bingham McCutchen LLP.