Breakthrough For Individual Investors: Cross-boundary Wealth Management Connect

Most Hong Kong participating banks^[1] partner with their respective group or affiliate banks in the Mainland and each partner with one Mainland partner bank only. However as the WMC scheme continues to grow, participating banks are increasingly exploring additional partnerships with third party banks. This is an important trend as partnership arrangements with third-party banks demand more intense negotiation on cooperation agreements and more careful consideration of:

• Profit sharing arrangement - Clearly agreeing on the profit-sharing model and payment methods for the partnership arrangement. Importantly, profit calculation methods should take into account currency exchange rates and tax liabilities in Hong Kong and in the Mainland.
• Marketing and IP rights - Clearly specifying the scope of the marketing activities as well as protection of the intellectual property rights, particularly when banks may be partnering with more than one bank.
• Personal data protection obligations - Clearly set out each party’s duty and obligation with respect to privacy law compliance, as each partner’s privacy policies and practices may differ. As set out below, it is increasingly important for any cross-border transfer of personal data to and from the Mainland to comply with personal data laws. 

In addition to Hong Kong banks, regulators are exploring the potential for licensed brokerages to participate in the WMC scheme.^[2] We look forward to seeing further developments and variety in partnership arrangements.

Widening of eligible product scope

Currently, participating banks are mainly providing low-to-medium risk and non-complex wealth management products in the initial stage of the WMC scheme.

We anticipate that investment products with higher levels of risk or more complex structures may be permitted under the WMC scheme at a later stage and allow wider market participation, based on recent budget statements.

Hong Kong has been “working with the regulatory authorities in the Mainland to explore enhancement measures for the Cross-boundary Wealth Management Connect Scheme in the Guangdong Hong Kong Macao GBA, such as increasing quotas gradually, expanding the scope of eligible investment products, inviting more participating organisations and improving the distribution arrangement.” (2022-2023 Budget, the Financial Secretary of Hong Kong, 23 Feb 2022)

Ongoing Challenges

Cross-border data transfer and compliance with data privacy laws 

Given the inevitable sharing of individual customers’ personal data between Hong Kong and Mainland, participants must pay extra attention to compliance with the relevant data privacy laws.

The long-waited Personal Information Protection Law is the first piece of legislation in the Mainland dedicated to the protection of personal information. Passed by the Standing Committee of the National People’s Congress on 20 August 2021, it was effective from 1 November 2021.

The law contains provisions on extraterritorial application. Foreign organisations (including Hong Kong participating banks) which process personal information of individuals in the Mainland for the purposes of offering services and products under the WMC scheme to them, or analysing and assessing their behaviours, are subject to this law.

Banks are under stringent data protection obligations, including obtaining customers’ consent and conducting security assessments before carrying out cross-border data transfer activities, especially when personal data is involved. There is a regulatory trend of enhanced scrutiny of cross-border data transfer in the Mainland. Any partnership arrangement should ensure the obligation to comply with such laws are clearly allocated amongst the relevant parties. 

Account opening by Hong Kong investors – physical travel 

In respect of the Southbound WMC scheme, it is relatively easy for eligible Mainland investors to open bank accounts with Hong Kong banks as they can do so remotely by attestation without any visa requirement.

However, for the Northbound WMC scheme, Hong Kong investors are required to physically travel to one GBA city in the Mainland to complete the account opening procedures. This creates an extra hurdle for Hong Kong investors particularly under pandemic settings. Whilst we understand that some flexibility has been proposed (eg some Mainland partner banks are offering online channels for customers to submit information, and an investor may designate an existing RMB account maintained with the same Mainland partner bank as the investor’s investment account), the requirement to travel to the Mainland to complete the account opening process still presents a significant difficulty for the Northbound flow.

We understand that the HKMA is exploring using the Southbound Scheme attestation procedure for account opening under the Northbound Scheme.^[3] We look forward to the authorities providing further relaxation to the account opening requirements to facilitate access to the WMC scheme by Northbound investors.

Way Forward

The WMC scheme is a major breakthrough for investment across the GBA. The scheme fosters financial integration and creating greater connectivity between Hong Kong and the Mainland. Flexibility is given to retail investors to open and operate cross-boundary investment accounts directly, through a formal and convenient channel, and to choose their preferred investment products.

For capitalized terms which are not defined in this alert, please refer to 'Sidebar - The Words We Use' in our foreword here.

Disclaimer: This alert is provided for general information purposes only and does not constitute legal advice.

References

[1]  Lists of eligible Hong Kong banks and their Mainland partner banks which can launch the Southbound Scheme services and the Northbound Scheme services.

[2]  https://www.bloomberg.com/news/articles/2022-03-16/hong-kong-pushes-to-open-greater-bay-wealth-connect-to-brokers

[3]  https://wwwhkma.gov.hk/eng/news-and-media/insight/2021/09/20210910/