The widely anticipated Cross-boundary Wealth Management Connect Pilot Scheme (Wealth Management Connect), expected to create a combined funds flow of RMB 300 billion (US$46.5 billion) in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA), has formally launched on 10 September 2021.
Wealth Management Connect, which will come into operation in October 2021, consists of northbound and southbound routes (the Northbound Scheme and the Southbound Scheme). Under Wealth Management Connect, eligible Mainland, Hong Kong and Macao residents can carry out cross-boundary investments in (low-to-medium risk) wealth management products distributed by banks in the GBA through a closed-loop funds flow system.
The Hong Kong Monetary Authority (HKMA) has released implementation arrangements and specific regulatory requirements in respect of Wealth Management Connect activities between the nine Mainland cities in the GBA and Hong Kong (the Circular).[1] The Circular applies to Hong Kong banks participating in Wealth Management Connect. The HKMA has also issued an FAQ to provide additional supervisory guidance to the banking industry.[2]
Background
The HKMA, the People’s Bank of China (PBoC) and the Monetary Authority of Macao (MAM) first announced the decision to implement Wealth Management Connect in the GBA on 29 June 2020.[3] In February 2021, the HKMA, the PBoC, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission, State Administration of Foreign Exchange, the Securities and Futures Commission (SFC) and MAM signed the “Memorandum of Understanding on the Launch of the Cross-Boundary Wealth Management Connect Pilot Scheme in the GBA”[4], paving the mechanism for supervisory cooperation between the authorities in anticipation of Wealth Management Connect.
The release of the Circular by the HKMA, marking the launch of Wealth Management Connect, follows three rounds of industry consultation. The remainder of this blog summarises the key regulatory requirements under the Circular.
Hong Kong banks eligible to offer Wealth Management Connect services
Registered institutions (including foreign bank branches, see Q7 of the FAQs) registered under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) regulated activity, and engaging in retail banking or private banking business (Hong Kong banks) are eligible. A Hong Kong bank may partner with more than one eligible Mainland bank[5] to provide services under Wealth Management Connect.
Hong Kong banks do not need to obtain approval from the HKMA before carrying out Wealth Management Connect activities but are required to notify the HKMA, and submit a self-assessment, at least one month in advance. A Hong Kong bank may embark on Wealth Management Connect activities only after it has received a “no-objection” notification from the HKMA and ensured that its Mainland partner bank has received a similar confirmation from the relevant Mainland regulatory authorities.
For guidance on the permitted ways in which a partnership arrangement may be presented to the Hong Kong public, please refer to Q3 of the FAQs.
Northbound Scheme at a glance
Eligible investors: Hong Kong residents who hold a Hong Kong identity card (including permanent and non-permanent residents) and are assessed by Hong Kong banks as not falling within the vulnerable customer segment (“Northbound Scheme Investors”). Northbound Scheme Investors must only invest in their personal capacity and should not authorise a third party to operate the account. Hong Kong banks must conduct customer due diligence to verify eligibility.
Eligible wealth management products: Wealth management products distributed by Mainland banks that are of low-to-medium risk and relatively simple are eligible under the Northbound Scheme, subject to the implementation arrangements issued by the Mainland regulatory authorities.
Account opening and operation: A Northbound Scheme Investor is required to open a dedicated Wealth Management Connect remittance account with a Hong Kong bank and a dedicated investment account with the Mainland partner bank to form a closed-loop funds flow. Hong Kong banks may assist Northbound Scheme Investors to open such accounts with Mainland partner banks (see Q22 of the FAQs). Any fund transfers outside the closed-loop accounts arrangements are strictly prohibited. Hong Kong banks should take appropriate measures to ensure that a Northbound Scheme Investor only has one Wealth Management Connect remittance account under the Northbound Scheme (see Q24 of the FAQs for guidance on the applicable measures).
Aggregate and individual quota: Remittance to the Mainland under the Northbound Scheme is subject to an aggregate quota which is initially set at RMB 150 billion. Each investor is also subject to an individual investor quota which is set at RMB 1 million. Both quotas are calculated on a net basis.
Cross-boundary remittance: Cross-boundary remittance should only be conducted between the dedicated investment and its paired dedicated remittance account. In other words, the funds are subject to closed-loop management (this applies to the Southbound Scheme also).
Promotion and sale: Hong Kong banks may, through media, communication channels and briefings organised in Hong Kong, introduce Wealth Management Connect by providing general information (including scope and categories of eligible products, quota, funds remittance and transfer arrangements) and provide factual and fair representations of services under the Northbound Scheme as offered by the bank (including arrangements for opening the dedicated remittance accounts).
Hong Kong banks should be mindful that the contents of promotional materials do not (i) involve any form of solicitation or recommendation; (ii) constitute an offer to the Hong Kong public in relation to investment in individual products; or (iii) amount to active marketing of the Mainland partner bank’s Wealth Management Connect services to the Hong Kong public.
For detailed guidance on the dos and don’ts regarding specific promotional strategies, please see Q26 of the FAQs.
Southbound Scheme at a glance
Eligible investors: Residents of the 9 Mainland cities in the GBA (Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoxing) who the meet the requirements prescribed by the Mainland regulatory authorities.
Account opening and operation: In opening dedicated investments accounts for Mainland investors, Hong Kong banks must conduct customer due diligence, vulnerable customer assessment and risk profiling assessment (see Q12 of the FAQs).
Aggregate and individual quota: Remittance from the Mainland under the Southbound Scheme is subject to an aggregate quota which is initially set at RMB 150 billion. Each investor is also subject to an individual investor quota which is set at RMB 1 million. Both quotas are calculated on a net basis.
Eligible wealth management products: Eligible products include investment products (excluding products listed and traded on the Hong Kong Exchanges and Clearing Limited), products that are of low-to-medium risk and non-complex (including funds domiciled in Hong Kong and authorised by the SFC and bonds), and deposits in RMB, Hong Kong dollars and foreign currencies. Hong Kong banks should conduct pre-sale and ongoing product due diligence to ensure the products sold are eligible wealth management products (see Q14 of the FAQs).
Other regulatory requirements: Hong Kong banks are reminded to comply with conduct related requirements, including the SFC Code of Conduct and SFC’s “Guidelines on Online Distribution and Advisory Platforms” when selling investment products (see Q16 of the FAQs).
Promotion and sale: Similar restrictions as the Northbound Scheme apply to the promotion of services and individual products under the Southbound Scheme. In general, transactions in wealth management products under the Southbound Scheme conducted by Hong Kong banks for their customers should be carried out on an “execution-only” basis (i.e. no recommendation or solicitation unless the Southbound Scheme customer is present in Hong Kong).
For detailed guidance on the dos and don’ts regarding specific promotional strategies, please see Q17 of the FAQs.
Breaches and non-compliance under Wealth Management Connect
A Hong Kong bank has a duty to file a report with the HKMA immediately if it becomes aware of any non-compliance or breach by an individual investor of any matters under applicable laws and regulations or relevant guidance, including the Circular.
The HKMA will perform regular on-site examination and off-site surveillance in relation to Wealth Management Connect activities. In the event of any non-compliance with applicable laws or regulations, codes of conduct or related guidance, the HKMA may suspend the Wealth Management Connect activities of the relevant bank and require such bank to handle related funds in accordance with the HKMA’s instructions. Depending on the nature of the breach, enforcement action may also be taken by the HKMA and/or the SFC against the Hong Kong bank and/or its relevant officers.
Comment
The framework and rules governing Wealth Management Connect are expected to take shape over time, not only to iron out any teething problems but also to cater for the changing investment landscape in the GBA. Although the current range of eligible products is restricted in scope, we expect this to gradually expand after the pilot phase. As with Stock Connect, we envisage that the initial quota will eventually be lifted. In the meantime, it will be interesting to see how the market responds to this significant development in the GBA in the coming months.
[1] The HKMA issued a circular to registered institutions on 10 September 2021. The regulatory requirements applicable to the Southbound Scheme and the Northbound Scheme are contained in Annex 1 and Annex 2 respectively.
[2] https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2021/20210910e1a3.pdf
[3] https://www.hkma.gov.hk/eng/news-and-media/press-releases/2020/06/20200629-4/
[4] https://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2021/20210205e4a1.pdf
[5] An eligible Mainland bank is a financial institution of the Mainland banking industry in the GBA which meets certain criteria set by Mainland regulatory authorities.
