The China Insurance Regulatory Commission (CIRC) released on 22 June 2016 the Circular on Strengthening the Business Regulation of Portfolio-type Insurance Asset Management (CIRC [2016] No. 104) (the 2016 Circular), which took effect on 13 June 2016.

Background and purposes

In 2013, the CIRC issued the Circular on Issues Related to the Pilot Business of Asset Management Products by Insurance Asset Management Companies (CIRC [2013] No. 124) (the 2013 Circular), to allow for the issuance of oriented products (for one investor) and collective products (for multiple investors) (Products) by insurance asset management companies to qualified investors including domestic insurance group (holding) companies, insurance companies, and other insurance asset management companies.

The 2016 Circular aims to further regulate the management, issuance and registration of the Products, clarify and supplement the investment scope of the Products under the 2013 Circular, and curb some emerging noncompliant market practice.

Qualification requirements for issuing Products

In addition to the qualification requirements provided under the Interim Administrative Measures for the Entrusted Investment of Insurance Funds (CIRC [2012] No.60) and the 2013 Circular, the 2016 Circular stipulates that the insurance asset management companies issuing Products shall also satisfy requirements as follows:

  • It should have obtained the qualification for insurance asset entrustment management for more than one year;
  • It should have set up a special product business management department, with at least five professionals having experience in product research and design, investment management, legal compliance and risk management;
  • It should have relevant qualifications if CIRC sets forth any requirements on the investment management capability of relevant underlying assets;
  • It should submit a third party special audit report on the internal control of the utilisation of insurance fund during the previous year; and
  • It should not be under investigation by any regulatory or judicial authorities, nor subject to rectification. Further, it should be free from any administrative or criminal punishments as a result of material illegal activities or negative creditworthiness.

Investment scope of underlying assets

The 2016 Circular stresses that the investment scope of the Products shall strictly follow the requirements under the 2013 Circular. In the event that a Product is a collective product or its fund involves insurance funds, its investment scope shall be limited to:

  • domestic liquid assets, mainly including cash, money-market funds, current deposits in banks, time deposits in banks subject to advance notice of withdrawal, government bonds, quasi-government bonds and reverse repurchase agreements with remaining period of no more than 1 year;
  • domestic fixed-income assets, mainly including time deposits in banks, agreed deposits in banks, bond funds, bonds of financial institutions (companies), bonds of non-financial institutions (companies), and government bonds, quasi-government bonds and reverse repurchase agreements with remaining period of more than 1 year;
  • domestic equity assets, mainly including publicly issued and listed shares (excluding the shares traded on the National Equities Exchange and Quotations), equity funds, and hybrid funds; and
  • infrastructure investment programs, equity investment programs and asset-backed programs issued by insurance asset management companies.

Issuance, registration and classification of Products

Pursuant to the 2013 Circular, except for issuing Products for the first time, which shall report to CIRC in advance, the insurance asset management company may report to CIRC within 15 business days from the issuance of Products.

In order to better supervise the issuance of Products, the 2016 Circular converts the "postreporting" mechanism to pre-issuance registration. According to the 2016 Circular, prior to issuance of Products, the insurance asset management companies shall register the Products and make information disclosure on the asset trading platform (the Platform) designated by CIRC.

Insurance asset management companies shall also make clear classification of the Products and specify the type of the Products in the contracts and prospectus.

Eight prohibited activities

One of the highlights of the 2016 Circular is to elaborate the eight activities which CIRC explicitly prohibits the insurance asset management companies from carrying out:

  1. Issuing "asset pool" Products per se, which means the Products invest in non-open market with features of accumulating fund raising, mixed operation, maturity mismatch, separation pricing, no separate accounts, or non-independent account;
  2. Issuing Products with "nested structure", including Products invested in single product in non-open market, or invested in alternative asset management products, or invested in products set up by the same asset manager;
  3. Issuing structured Products to non-institutional investors;
  4. In the event of issuing structured Products to institutional investors, the leverage of equity and mixed Products exceeds 2x or the leverage of other grading Products exceeds 3x;
  5. Managing the Products under a sub-account;
  6. Failing to specify the type and ratio of specific underlying assets, vaguely stating that the investment ratio in relevant assets is 0 to 100% instead;
  7. Transferring the entrustment of Products management by means of external investment counsel; and
  8. Entrusting the branches of custodian bank as the custodian of the Products.

CIRC urges insurance asset management companies to conduct self-correction to comply with the requirements provided under the 2016 Circular prior to 31 August 2016.