At the end of October, 2019, the Department of Fund and Intermediary Supervision of the China Securities Regulatory Commission (“CSRC”) promulgated the Notice on the Pilot Implementation of the Public Offered Mutual Fund Investment Consulting Business (《关于做好公开募集证券投资基金投资顾问业务试点工作的通知》, the “Notice”) and the mutual fund investment consulting business (“MF Consulting Business”) is officially put into pilot implementation.
The Notice provides specific guidance on how to conduct the MF Consulting Business. Qualified Institutions are entitled to apply for the MF Consulting Business qualification in order to advise their clients on the mutual fund investment portfolios and strategies, and subscribe, redeem, convert or otherwise trade the mutual funds for and on behalf of their clients (which is similar to a “Discretionary Mandate”). Before the promulgation of the Notice, institutions may only issue wealth management products to manage the investments for their clients, and the underlying investments are held by the wealth management products, while the clients only own the shares of the wealth management products instead of the relevant underlying investments directly. Now, for the first time, the Notice enabled the “Discretionary Mandate” business model by allowing investment consultants to, under the authorization granted by the clients, operate the clients’ account(s) directly. Under this model, the clients will be documented as the direct holder of the underlying investments and there is no need for the relevant institutions to issue the wealth management products any more.
1. Institutions Eligible for the Application of the MF Consulting Business Qualification
In accordance with the Notice, (i) institutions with asset management qualification (such as securities companies and fund management companies); and (ii) fund distribution institutions (such as commercial banks, securities companies, futures companies and insurance companies with fund distribution qualification and independent fund distribution institutions) with no less than RMB 10 billion balance of distributed mutual funds (exclusive of money market funds) may apply for the MF Consulting Business qualification.
In addition, the applicant shall also meet the requirements relating to the client base, compliance records, research team, investment consultants, information technologies, business solutions and policies.
Based on the institutions which are granted with the qualification, we understand that the securities companies and fund management companies (including their subsidiaries with the fund distribution qualification) with asset management qualification are more likely to obtain the MF Consulting Business qualification. In respect of the institutions with the fund distribution qualification, we understand that the majority of the qualified institutions are the leading institutions due to the RMB 10 billion balance requirement. Nevertheless, it remains to be seen whether private fund managers are qualified to apply for the MF Consulting Business qualification as “institutions with asset management qualification”.
2. Application Process
In accordance with the Notice, to apply for the MF Consulting Business qualification, an institution shall fill with the CSRC. Then, the CSRC will review the applicant’s business plan and preparation status through a professional review committee in order to determine whether to grant the qualification.
As far as we are aware of, Harvest Fund (acting through its subsidiary with the fund distribution qualification, Harvest Wealth), China Asset Management (acting through its subsidiary with the fund distribution qualification, China Wealth Management), E Fund, China Southern Asset Management, and Zhong Ou Asset Management (acting through its subsidiary with the fund distribution qualification, Qiangungun) have obtained the MF Consulting Business qualification.
3. Restrictions on the MF Consulting Business
We note that there still exist some restrictions on the MF Consulting Business:
(1) Although the “Discretionary Mandate” business model is permitted in the MF Consulting Business for the first time, the underlying assets thereunder are restricted to the mutual funds (theoretically, underlying assets may also include the “similar product permitted by the CSRC” other than the mutual funds, however, currently, no such “similar product” is permitted by the CSRC), but stocks and bonds are not included as the underlying assets under the “Discretionary Mandate” business model.
(2) The Notice further restricts the fee standards of the institutions providing the consulting services: the annual service fee shall not exceed 5% of the net asset value of the client’s account, while in the case that annual fee or membership fee or the like is charged instead of the annual service fee, the ceiling is RMB1,000 per annum. In the meantime, if the institutions providing the consulting services charge the fund managers the client maintenance fee, such charges shall set off the relevant consulting fees to avoid duplicated payments.
(3) In respect of the institutions providing the consulting services without the fund distribution qualification, to adopt the “Discretionary Mandate” business model, they need to cooperate with the relevant fund managers or other institutions with the fund distribution qualification, in order to effect the subscription, redemption and conversion of the target mutual funds.
(4) The MF Consulting Business qualification is not perpetual. For the sake of prudence, a one-year test period is set out in the Notice in respect of the MF Consulting Business and the relevant qualification will be terminated or revoked if the consulting business cannot meet the expectations after assessment when the test period elapsed, or any material adverse incidence occurs during the test period.
4. Market influence
The “Discretionary Mandate” business model under the MF Consulting Business is much closer to the business model relating to the investment management by a licensed institution for their clients adopted in the offshore market. It, to certain extent, may act as an alternative of the fund-of-funds model and it is a significant policy breakthrough in the new era of wealth management since the investment layers are reduced, the ownership structures are simplified and it is more convenient for the investors to become aware of the invested underlying assets. If, in the future, the scope of the underlying assets could be expanded to include wealth management products other than the mutual funds, or even stocks and bonds, it might become a great step to affect the current wealth/asset management business models.