In a significant move to deepen financial connectivity within the Greater Bay Area (“GBA”) and bolster Hong Kong’s position as an international financial centre and offshore RMB hub, the Hong Kong[1] and China Mainland[2] regulators have released revised guidelines for the Cross-Boundary Wealth Management Connect Pilot Scheme (“WMC scheme”).[3] This initiative, announced on 24 January 2024, is part of a broader strategy encompassing six policy measures to strengthen financial integration and promote cross-border investment within the GBA.
In this article, we examine the amendments made to the implementation guidelines and explore the opportunities brought about by the revised guidelines, which will come into effect on 26 February 2024.
What is new?
1. Broadening participation: opening doors for securities firms
The revised guidelines extend eligible participants in the WMC scheme beyond eligible banks to encompass eligible securities firms. In offering WMC services, a securities firm may collaborate only with other securities firms, while a bank may collaborate only with other banks.
Investors may now diversify their investment channel by investing with both an eligible bank and an eligible securities firm, or exclusively with just one eligible participating institution.
The Securities and Futures Commission (“SFC”) has released regulatory requirements for licensed corporations participating in the WMC scheme, which closely align with those imposed on banks by the Hong Kong Monetary Authority (“HKMA”). This section focuses on the amendments made to the implementation guidelines issued by the HKMA. We will explore the disparities between the HKMA and SFC regulatory regimes in the next section.
2. Expanding investor base: lowering barriers for eligible Mainland investors
The investor eligibility requirements under the Southbound WMC scheme have been relaxed to capture a wider spectrum of Mainland investors. In particular:
- (shorter residency period requirement) the minimum years of payment of social security or personal income tax in any of the nine Mainland cities within the GBA has been reduced from five years to two years; and
- (lower financial resources requirement) the financial resources requirement may now be satisfied by demonstrating an average personal annual income of not less than RMB 400,000 in the past three years.
3. Boosting investment volume: increasing individual investment quota
The individual investment quota under the WMC scheme has been increased from RMB 1,000,000 to RMB 3,000,000.
Investors may not freely allocate their investment quota between their selected bank and securities firm. Where an investor opts to invest through both a bank and a securities firm, their individual investment quota will be divided equally, with RMB 1,500,000 allocated to each institution.
4. Diversifying investment options: widening scope of eligible wealth management products
This table compares the scope of eligible wealth management products under the Southbound and Northbound WMC schemes under the original and revised guidelines.
For the purpose of this article, “Hong Kong” refers to the Hong Kong Special Administrative Region of the People’s Republic of China.
For the purpose of this article, “China Mainland”, “Mainland” and "PRC" refer to the People’s Republic of China, excluding Hong Kong, the Macao Special Administrative Region of the People’s Republic of China and Taiwan.
For an overview of the framework of the WMC scheme (which is updated as outlined in this article), please refer to our publications in July 2020 and September 2021.
Article 16 of the Detailed Rules for the Implementation of the Pilot Program of Cross-Border Wealth Management Connect in the Guangdong-Hong Kong-Macao Greater Bay Area (粤港澳大湾区“跨境理财通”业务试点实施细则) (as updated).
Pursuant to Article 18 of the General Principles of the Civil Code of the People's Republic of China (中华人民共和国民法典), (i) natural persons attaining the age of 18 and (ii) natural persons attaining the age of 16 and primarily relying on their own labour income are deemed to have full capacity for civil conduct.
Eligible funds and bonds under the Southbound WMC scheme must not be “complex”. Factors for ascertaining this include (but are not limited to):
- whether the product is a derivative product;
- whether a secondary market is available for the product at publicly available prices;
- whether adequate and transparent information about the product is available to investors;
- whether there is a risk of losing more than the amount invested;
- whether any features or terms of the product could fundamentally alter the nature or risk of the investment or payout profile or include multiple variables or complicated formulas to determine the return; and
- whether any features or terms of the product might render the investment illiquid and/or difficult to value.
5. Enhancing operational details: clarifying permissible promotion and sales arrangements under the Southbound WMC scheme
The original WMC guidelines required that transactions under the Southbound WMC scheme be conducted on an “execution-only” basis unless an investor is physically present in Hong Kong. Uncertainty as to what constitutes “execution-only” led market participants to adopt a conservative interpretation, limiting the conduct and promotion of their WMC services.
Under the revised guidelines, the notion of “execution-only” is replaced with further guidance on promotion and sales arrangements permissible under the WMC scheme. This is expected to instil greater confidence in banks and securities firm when devising promotion and sales strategies for their WMC services. There may remain a level of uncertainty on the extent of permissible cross-border marketing activities in practice.
Comparison between the HKMA and SFC regulations
This table compares the WMC regulatory requirements imposed on participating banks by the HKMA and those imposed on participating licensed corporations by the SFC under the WMC scheme.
Illustrative closed-loop fund flow under the HKMA and SFC regulatory frameworks
This diagram illustrates the closed-loop fund flow arrangement for investments under the WMC scheme. Institutions denoted in blue represent those under the HKMA regime, while those denoted in gold represent those under the SFC regime.
Importantly, the segment in gold is only relevant for the SFC regime.
For a summary of the key features of remittances under the WMC scheme, please refer to our publication in September 2021.
Way forward
Existing WMC scheme participants should review their client documentation and cooperation agreements to comply with the latest guidelines. Securities firms and non-participating banks should now revisit their business strategies for business opportunities to take advantage of the enhanced WMC scheme to facilitate cross-border investments by the broaden customer base in the GBA.
In addition, institutions offering WMC Southbound services may engage in the processing of personal information relating to Mainland individuals and be subject to the PRC Personal Information Protection Law ("PIPL”). We have been advising our bank clients on the implications of the PIPL on their business operations under the WMC scheme.
How we can help
We have extensive experience in advising banks on the WMC scheme, drafting WMC client documentation and cooperation agreements, and advising on relevant data protection laws and regulations in Hong Kong and China Mainland. Our comprehensive understanding of the scheme, its implementation guidelines and the relevant regulatory policies is supported by our many years of experience working with market participants and regulators.
We worked with the Asia Securities Industry & Financial Markets Association (ASIFMA) on its paper “China’s Capital Markets – A Market in Transition” to analyse practical challenges faced by WMC scheme participants and propose enhancements to the WMC scheme, some of which were adopted in the revised guidelines.
We also worked with the Financial Services Development Council (FSDC) on policy recommendations for developing the A-Share market and Stock Connect, as set out in their report titled “One Step Forward: Expanding Access to the A-Share Market” and summarised in our publication in September 2020.
To explore further, please contact our responsible partners.
Disclaimer: this article is intended to highlight the latest regulatory update in respect of the WMC scheme and provide general information. This article is not intended to be and should not be construed as legal advice.
