Chinese Banks' Offshore Wealth Management Units

Xiaoping's southern tour in 1992. Therefore, the first private bank in China was launched as late as March, 2007 by the Bank of China and Royal Bank of Scotland. In the following five years, China's private banking boomed, with assets of over 23 trillion yuan today, which means that private banks are faced with unprecedentedly exciting opportunities.

It must be noted, however, that private banks not only face competition from mutual funds, private equity funds, insurance companies, securities companies, trust companies, futures companies, third-party wealth managers including Noah, as well as emerging P2P wealth management institutions like ppdai.com, CreditEase and crowd-funding (of course, there is some cooperation), but also faces upgrades in new wealth management payment tools such as mobile payment and Internet payment. Whether a private bank can have an invincible position in the competition depends on its ability to keep abreast of the trend and provide more competitive, more personalized financial services and products.

As for the competition facing private banks, the trust industry is an example. According to the China Trustee Association data, the trust assets under management in 2012 exceeded seven trillion yuan. Another example is securities companies' collective wealth management and asset management business. Since the implementation of one measure and two rules (Administrative Measures for the Client Asset Management Business of Securities Companies, Implementation Rules on the Collective Asset Management Business of Securities Companies and Implementation Rules on the Directional Asset Management Business of Securities Companies), the securities companies' asset management and collective wealth management business embraced an unprecedented golden era. According to the Securities Association of China, the total assets under management of securities companies were expected to approach the 1-trillion yuan mark, making it the fastest growing segment in the wealth management industry. The recent news is that after the wealth management business of securities companies and the subsidiaries of fund companies, 18 futures management companies have recently also received the licenses to conduct trial operation of the asset management business, with the investment range of futures, options and other financial derivatives, stocks, bonds, securities investment funds, collective asset management plans, central bank bills, short-term financing bonds, and asset-backed securities. It's apparent that private banks are facing unprecedented competition!

For the Internet-based trend and online merchants for private banking and financial products, as online payment services providers like ChinaPnR and Alipay go mature, a giant e-commerce market for financial products has gradually developed and online retailers have become the trend. Therefore, it can be said that Bill Gates' prediction more than ten years ago that "Bank is the dinosaur to be extinct in the modern world" has become a reality in today. In this sense, private banks are facing a real revolution. (Private) banks should take the initiative to make adjustment and adopt the Internet-based model for the (private) banking business, especially the mobile Internet technology. Nowadays, funds, banks' wealth management products and trust products can all be bought on the Internet. But private banks' products apparently lag behind other industries and need to catch up.

However, in the era of "We Media" on the Internet, dissemination of negative information is fast and can leave traces. Any client can surf the website for information before choosing to accept the private banking services from a certain bank. Generally speaking, banks with more good comments and more clients will undoubtedly win the battle. In order to respond to such a change, private banks must greatly enhance the IT infrastructure and data inputs. Of course, this is not to say that the offline services are not important. In fact, on the contrary, online services ultimately rely on offline services.

However, clients' increasing demand for immigration and the expansion of offshore assets and wealth have made offshore asset management increasingly important. Due to the need for tax savings and seeking confidentiality, customers increasingly favor offshore asset management while the Internet has a cross-border nature, leading the private banking business into an offshore trend. Offshore accounts, offshore companies, offshore finance, offshore trusts, offshore funds, and other offshore structured products and financial instruments have been fully developed. Customers can wrap up allocation and management of offshore assets and wealth from an onshore base. From the legal point of view, the client constantly sets up, changes and eliminates offshore legal relationships in terms of wealth management, thus bringing a series of conflicts and problems with regard to the applicable laws.

Although most of the banks are aware of the importance of the private banking and wealth management business, they face the following troubles in developing private banking business in China:

1. Some of the private banks don't have high credibility and don't really implement the bank philosophy of "Customer First". The interests of customers are likely to be violated in the event of a dispute. Some banks are set to avoid shouldering the responsibility after receiving complaints. This behavior is directly contrary to the notion that private banks must ensure the security of clients' wealth. It also cripples the trust of the customers in the private banks. Trust/creditability is the cornerstone of the banking and financial industry!
2. The wealth management products of some banks don't comply with the rules, and it's common for banks to take advantage of the regulatory system by "playing edge ball". Of course, this is also related to excessive regulation in the banking industry regulation. Under the premise of risk control, regulators should speed up the deregulation of the market to provide enough space for innovation in the future.
3. Some banks don't have strict internal control on private banking and wealth management operation. Disclosures of product information are not transparent, accurate and adequate. They don't fulfill fully the obligations in terms of key provisions and risk disclosures, setting the stage for future disputes.
4. Investor education is not enough. The awareness of the "caveat emptor" is not yet widely accepted and investors tend to seek high yields without paying enough attention to or simply neglecting risk controls. The general structures and items of the wealth management products of private banks are complicated while clients tend to rush in and sign the agreements. They tend to require the bank to shoulder the responsibility whenever the product doesn't fetch the expected return. Therefore, investors should be educated and should have a better understanding of the risks.
5. It is difficult to solve disputes. As the terms of private banks' structured products are usually complex and technical while China still lacks talents in supervisory bodies to handle such disputes, clients don't have a sound system to get a relief from disputes. The offshore trend of the private banking business exacerbates the situation to some extent. The long-term healthy development of the private banking business also depends largely on how the above problems are resolved.