The Guidelines on Business Cooperation between Banks and Trust Companies went into effect on December 4, 2008. The Guidelines are the first set of provisions that the China Banking Regulatory Commission (CBRC) has issued to regulate business transactions between banks and trust companies. Commentators have pointed out that the Guidelines signify that the regulators are encouraging trust companies to improve their abilities to operate on their own and to expand their businesses, while at the same time keeping an eye on risk management issues.
The Guidelines divide the cooperation businesses between banks and trust companies into two categories: cooperation on financial management, and other cooperation businesses, including securitization of trust assets, banks’ recommendations of trust plans, agency arrangements between banks and trust companies on the management of debits and credits of trust funds, and trust companies’ investment of trust assets in financial institutions’ equities. The Guidelines set forth basic requirements for banks and trust companies to comply with when cooperating on these matters.
According to the Guidelines, cooperation on financial management between banks and trust companies means that banks deliver the funds under their financial management plans to trust companies, which act as trustees in managing and disposing of the funds in accordance with the trust documents they have agreed upon with the banks. When banks and trust companies work together on financial management, the Guidelines require that both banks and trust companies establish effective regulatory compliance systems and risk management systems. Also, the banks must disclose the potential risks associated with a financial management plan to their clients, and the trust companies must disclose relevant information and risks to the banks in accordance with the law and the trust documents. The Guidelines prohibit banks from referring to the “expected return rate” or “maximum return rate” without precise calculations or without providing the basis or method for the calculations. When a bank and a trust company cooperate on trust matters, the bank must assign at least one financial planning manager to each financial management plan, and the trust company must appoint at least one trust manager to manage the trust product under the cooperation.
The Guidelines also spell out rules on the cooperation between banks and trust companies regarding asset securitization. The Guidelines state that when banks put credit assets in trust with a trust company, and the trust company issues asset-backed securities to the banks, their activities are governed by several administrative measures on the securitization of credit assets. In addition, the Guidelines specify that the scope, category, standard, and condition of the assets proposed for securitization must be specific and consistent with the asset information disclosed. According to the Guidelines, trust companies must select, on their own, institutions servicing the securitization transactions, such as loan service agencies, security registration institutions, accounting firms, and law firms, and banks may not interfere with the trust companies' daily management of trust matters.
The Guidelines specifically provide that trust companies may invest trust assets in financial institutions’ equities. If a trust company invests its trust assets in an affiliated financial institution, the investment should be made based on the fair market price, and the trust company must report each transaction.
With respect to risk management matters, the Guidelines provide that banks are not, by any means, allowed to guarantee a trust product involved in a bank-trust company cooperation. When investing in credit assets or note assets held by a bank, a trust company must buy out such assets, and the bank may not repurchase these assets in any form.
In interpreting the Guidelines, CBRC has stated that it practices the following principles when overseeing cooperation between banks and trust companies: “Support its development, regulate the cooperation, and safeguard against risks.” Commentators have viewed the Guidelines to be consistent with these principles as they encourage banks or trust companies to jointly explore new investment opportunities, and reflect CBRC’s efforts in building a more advanced capital market with well-established risk management systems.