Wealth Management Connect launch in October 2021

I. Background

After almost two years of market expectation, we welcome the release by the Hong Kong Monetary Authority ("HKMA") of the final version of the "Implementation Arrangements for the Cross-boundary Wealth Management Connect Pilot Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area" ("Hong Kong Implementation Rules")[1] on 10 September 2021. 

On the same day, the Guangzhou Branch of the People's Bank of China ("PBOC"), Shenzhen Central Sub-branch of PBOC, Guangdong Supervision Bureau of China Banking and Insurance Regulatory Commission ("CBIRC"), Shenzhen Supervision Bureau of CBIRC, Guangdong Supervision Bureau of China Securities Regulatory Commission ("CSRC") and Shenzhen Supervision Bureau of CSRC issued the final version of the "Implementation Arrangements for the Cross-boundary Wealth Management Connect Pilot Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area" ("PRC Implementation Rules")[2].

The Hong Kong and PRC Implementation Rules are substantially based on the earlier consultation drafts published in May 2021 with only slight adjustments[3].

The Cross-boundary Wealth Management Connect ("Wealth Management Connect") will soon operate across the GBA, with launch by the first batch of participating banks expected as early as October 2021.

According to the Hong Kong Implementation Rules, eligible banks in Hong Kong which intend to embark on Wealth Management Connect business must submit a self-assessment to the HKMA at least one month prior to the launch[4]. Hong Kong banks may only commence that business upon receiving a "no objection" notification from the HKMA.

The PRC Implementation Rules will take effect after 10 October 2021. Eligible Mainland banks must complete their system assessment and filing under the supervision and guidance of the Mainland regulatory authorities before launch.

This article summaries important information about Wealth Management Connect.

II. Wealth Management Connect – Southbound and Northbound

As mentioned in our article entitled "Greater Bay Area Series – Framework for the Wealth Management Connect announced" (July 2020)[5], Wealth Management Connect refers to an arrangement under which individual residents in the Guangdong-Hong Kong-Macao Greater Bay Area ("GBA")[6] carry out cross-boundary investment in wealth management products distributed by banks in the GBA.

The Wealth Management Connect between Hong Kong and Mainland China consists of the Southbound Scheme and the Northbound Scheme:

• under the Southbound Scheme, eligible residents in the Mainland cities in the GBA invest in wealth management products distributed by banks in Hong Kong ("Hong Kong Banks") via designated channels.
• under the Northbound Scheme, eligible residents in Hong Kong invest in wealth management products distributed by banks in the Mainland cities in the GBA ("Mainland Banks") via designated channels.

This diagram illustrates investment flows of the Southbound Scheme and the Northbound Scheme: 

 III. Key features

Key features of Wealth Management Connect are highlighted below:

(1) Scope of eligible investors – residents in the GBA

Eligible individuals in the Mainland cities of the GBA and Hong Kong can personally (but not in joint names) make cross-boundary investments through Wealth Management Connect.

The Southbound Scheme

According to the PRC Implementation Rules, eligible Mainland investors must meet the following requirements:

• have full capacity for civil conduct;
• have household registration in any of the 9 Mainland cities in the GBA or have paid social security or personal income tax in any of the 9 Mainland cities in the GBA continuously for at least 5 years;
• have more than 2 years of investment experience and an end-of-month balance of household financial net asset which is not less than Renminbi 1 million in the last 3 months, or have an end-of-month balance of household financial asset which is not less than Renminbi 2 million in the last three months; and
• use their own funds to purchase investment products.

The Northbound Scheme

All Hong Kong residents (including permanent and non-permanent residents) who hold a Hong Kong identity card and who are assessed by a Hong Kong Bank as not being "vulnerable" are eligible to participate in the Northbound Scheme.

Vulnerable customers

The Hong Kong Implementation Rules specify that Hong Kong Banks should conduct an assessment according to the relevant guidelines issued by the HKMA to ensure each investor is not vulnerable before providing Wealth Management Connect services to the investor[7]. This applies to both the Southbound and the Northbound Schemes. If, however, an existing customer becomes vulnerable due to a change in personal circumstances, the Hong Kong Bank can continue to provide Wealth Management Connect service by implementing certain enhanced protection measures.

(2) Eligible investment products – simple and "low" to "medium" risk products

Southbound Scheme

According to the Hong Kong Implementation Rules, eligible wealth management products under the Southbound Scheme include:

• investment products (excluding products listed and traded on the Hong Kong Exchanges and Clearing Limited)
  • funds domiciled in Hong Kong and authorised by the Securities and Futures Commission (SFC); and
  • bonds; and

The following products, which are assessed as “low” risk to “medium” risk and “non-complex” by the Hong Kong Bank distributing such products:

• deposits[8] – Renminbi, Hong Kong dollar and foreign currency deposits[9].

The first category (i.e. Hong-Kong-domiciled funds authorised by the SFC) present significant business opportunities for Hong Kong based fund managers as it may lead to an expansion in the retail client base - there being over 70 million people in the GBA[10]. There is room for structuring a Hong Kong-domiciled fund to contemplate different underlying investments or asset classes, provided that the fund is assessed to have a “low” to “medium” risk rating. 

Certificate of Deposits may potentially qualify as an eligible investment product if the CD is assessed as “low” risk to “medium” risk and “non-complex” and is not a structured deposit. 

If a wealth management product is denominated in a currency other than Renminbi, the investor must convert Renminbi into the relevant foreign currency in Hong Kong and will be exposed to currency exchange risk. According to the PRC Implementation Rules, all cross-boundary remittances of Wealth Management Connect must be conducted in Renminbi only and any FX/CNY currency conversion must take place in Hong Kong. It is therefore crucial to remind Mainland investors of the currency exchange risk associated with their investments under the Southbound Scheme.

Northbound Scheme

Under the Northbound Scheme, onshore Chinese wealth management investment products available for Hong Kong residents to invest include:

• publicly offered fixed income and equities wealth management products (except cash management financial products) issued by Mainland Chinese wealth management companies (including wealth management subsidiaries of PRC banks, and Sino-foreign wealth management joint venture companies), which are assessed by the issuers and Mainland Banks to be of "level 1" to "level 3" risk ratings[11]; and
• publicly offered securities investment funds assessed by Mainland public fund managers and Mainland Banks with a risk rating of "R1" to "R3".

(3) Account opening via attestation permitted under the Southbound Scheme

Under both the Southbound and Northbound Schemes, investors must designate a local account as the dedicated remittance account. After a local bank has reviewed the requisite application documents, investors may open a dedicated investment account with a designated bank in the other jurisdiction.

In respect of the Southbound Scheme, regardless of whether an eligible Mainland investor already has existing accounts with a Hong Kong Bank, the investor must open a separate investment account with a Hong Kong Bank as the dedicated investment account for Wealth Management Connect service. The rules permit Mainland investors to open bank accounts with Hong Kong Banks remotely by attestation without any visa requirement. We believe this will greatly reduce the difficulty for Mainland investors to open accounts and increase their willingness to participate in the Southbound Scheme, especially given the difficulties in travelling cross-border at present.

As regards the Northbound Scheme, a Hong Kong investor may open a new account which requires the physical presence of the investor in the Mainland or designate an existing account as the investment account. The HKMA is also exploring with Mainland regulatory authorities establishing arrangements for account opening by attestation under the Northbound Scheme[12].

(4) Account pairing and closed-loop mechanism

Like other cross-border connect schemes, one of the key issues under Wealth Management Connect is the restriction under the foreign exchange control policies in Mainland China. The account pairing and closed-loop cross-boundary fund flow requirements are the key starting points in ensuring such policies are complied with.

Under both the Southbound and Northbound Schemes, each investor must pair the investor's dedicated investment account with the investor's dedicated remittance account. The cross-boundary flow of funds between Mainland China and Hong Kong will be implemented through the link between the accounts, the closed-loop flow of funds and subject to quota restrictions.

This diagram shows the closed-loop mechanism of cross-boundary funds flow through the Cross-border Interbank Payment System ("CIPS"). 

The key features of remittances are summarised as follows:

• an investor may effect cross-boundary remittance of funds only if:
  • the remittance is effected between the dedicated investment account and the dedicated remittance account of the investor;
  • the remittance is in Renminbi only; and
  • the remittance complies with the aggregate and individual investor quotas prescribed by the regulators from time to time;
• funds deposited in the dedicated investment account can only be used to purchase eligible investment products. If the wealth management product is denominated in Hong Kong dollars or other foreign currencies, Renminbi will be converted into an appropriate currency in Hong Kong;
• investors cannot withdraw money from the dedicated investment account; and
• realised investment proceeds will be converted into Renminbi and remitted through the CIPS for cross-boundary remittance.

(5) Quota restriction

The cross-boundary fund flows under Wealth Management Connect are subject to aggregate and individual investor quotas, calculated on a net basis. The current aggregate quota is set at Renminbi 150 billion yuan for each of the Southbound Scheme and Northbound Scheme and the individual investor quota is set at Renminbi 1 million yuan:

 
IV. Other issues

(1) Cross border marketing issues

As an innovative mechanism to facilitate cross-border investments, Wealth Management Connect will inevitably require onshore and offshore partner banks to cooperate in providing, and supporting the on-going offering of financial services to customers in the GBA.

Under the Southbound Scheme, the restrictions on cross-border marketing activities in the Mainland reflect the current cross-border marketing principles applicable to banks in Hong Kong, and primarily adopts an "execution only" model on cross-border sales and marketing.

Similarly, under the Northbound Scheme, Mainland Banks are not allowed to travel to Hong Kong or Macao to carry out sales activities. The PRC Implementation Rules also prohibit Mainland Banks from actively inviting or soliciting customers, or providing investment advice across borders.

Cross-border sales and marketing activities continue to be subject to strict regulatory controls. Regulators must strike a balance between protecting investors' interests and fostering economic development. Financial institutions must ensure that all employees engaged in Wealth Management Connect clearly identify the regulatory boundaries of any marketing activity. 

(2) Cooperation between Hong Kong Banks and Mainland Banks

Banks across the GBA which intend to form a partnership should formulate a clear division of responsibilities in respect of the following issues:

• the operational arrangement in respect of account pairing;
• measures to ensure closed-loop fund remittance and quota monitoring;
• restrictions on the use of accounts;
• how to fulfill the anti-money laundering, anti-terrorism financing and anti-tax evasion obligations;
• personal data compliance obligations; and
• internal control on cross-border marketing activities.

In an earlier consultation draft of the Hong Kong Implementation Rules, a Hong Kong Bank could only partner with one Mainland Bank under each of the Southbound Scheme and the Northbound Scheme. The exclusive partnering requirement prompted onshore and offshore banks to liaise and enter into intra-group cooperation agreements with their affiliated institutions established in the other jurisdiction.

After extensive market consultation and a drive to level the playing field for banks across the Mainland, Hong Kong and Macao, the final version of the Hong Kong Implementation Rules and PRC Implementation Rules no longer requires the exclusive partnering requirement.  All Hong Kong Banks are now permitted to form partnerships with more than one Mainland Bank. This has been well received by the market. In assessing any partnering with banks that aren't affiliates, the partnering banks will need to assess and negotiate the cooperation agreement carefully. Banks must pay close attention to an array of commercial terms, the governing law clauses and cross-border dispute resolution clauses.

V. Conclusion

Wealth Management Connect is the first mutual market access mechanism for individual investors in the GBA. It facilitates cross-boundary investment by individual residents in the GBA, and is a crucial project and milestone in the financial development of the GBA. It will "further consolidate Hong Kong's role as an international financial centre and the world's offshore Renminbi business hub". Edmond Lau, the Deputy Chief Executive of the HKMA, pointed out that[13]:

"[the] Cross-boundary WMC can provide investors with a greater variety of wealth management products, further facilitate cross-boundary investment and create new opportunities for the financial industry in Hong Kong."

KWM has been closely following the development in Wealth Management Connect and actively participating in discussions with the regulators and market participants. We advise on Wealth Management Connect business models of many international financial institutions, leading local banks in Hong Kong and the Mainland. We have prepared the inter-bank cooperation agreements, client-facing documents (including application forms, Wealth-Management-Connect-specific terms and conditions, risk disclosure statements), operational manuals and training materials.

We have leading experience in advising clients on Wealth Management Connect and other GBA initiatives. We look forward to working with the industry to promote the implementation of GBA strategies and financial innovation. If you are looking for professional advice about the Wealth Management Connect, please feel free to contact us.

[1] Available at https://www.hkma.gov.hk/eng/regulatory-resources/regulatory-guides/circulars/.

[2] Available at http://guangzhou.pbc.gov.cn/guangzhou/129142/129156/129119/4337736/index.html/.

[3] The consultation draft of the PRC Implementation Rules "Implementation Arrangements for the Cross-boundary Wealth Management Connect Pilot Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area (《关于< 粤港澳大湾区"跨境理财通"业务试点实施细则> 公开征求意见的通知》)" (dated 6 May 2021) is available at http://guangzhou.pbc.gov.cn/guangzhou/129142/129156/3833128/4243943/index.html (Chinese only).

[4] Under the Hong Kong Implementation Rules, registered institutions registered under the Securities and Futures Ordinance (Cap. 571, The Laws of Hong Kong) ("SFO") for carrying on Type 1 regulated activity (dealing in securities), and engaging in retail banking or private banking business are eligible banks in Hong Kong.

[5] Available at https://www.kwm.com/en/hk/knowledge/insights/gba-series-wealth-management-connect-20200706.

[6] The Guangdong-Hong Kong-Macao Greater Bay Area ("GBA") comprises the two Special Administrative Regions of Hong Kong and Macao, and the nine municipalities of Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing in Guangdong Province. This may be subject to change from time to time.

[7] For more details, please refer to section (A)(III.2) of Annex 1 to the circular issued by the HKMA on 25 September 2019 entitled "Investor Protection Measures in respect of Investment, Insurance and Mandatory Provident Fund Products", available at: https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2019/20190925e2.pdf. 

[8] Please refer to the definition of "deposits" in the Banking Ordinance (Cap. 155, The Laws of Hong Kong) ("BO"). For the purpose of the Hong Kong Implementation Rules, deposits are regarded as wealth management products. For the avoidance of doubt, "deposits" as referred does not include structured deposits. 

[9] In its "Frequently Asked Questions on the Cross-boundary Wealth Management Connect in the Guangdong-Hong Kong-Macao Greater Bay Area" (dated 10 September 2021) ("FAQs"), the HKMA recommended that besides Renminbi and Hong Kong dollar, eligible deposits offered by Hong Kong Banks be denominated in one of the following currencies: Australian dollar, Canadian dollar, Euro, Japanese Yen, New Zealand dollar, Singapore dollar, Swiss Franc, UK Pound Sterling and US dollar. The FAQs are available at https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2021/20210910e1a3.pdf.

[10] With a population of over 70 million, the GBA has a combined GDP of US$1.6 trillion, greater than some of the G20 economies; and its per-capita GDP of US$23,000 is comparable to some middle-income countries. For more details, please refer to the HKMA's inSight "Wealth Management Connect Scheme in the Greater Bay Area" (dated 10 September 2021), available at https://www.hkma.gov.hk/eng/news-and-media/insight/2020/06/20200629/.

[11] Wealth management products offered in the PRC are generally categorised into risk levels ranging from level 1 (lowest risk) to level 5 (highest risk).

[12] HKMA, inSight "Cross-boundary Wealth Management Connect in the Guangdong-Hong Kong-Macao Greater Bay Area" (dated 10 September 2021), available at https://www.hkma.gov.hk/eng/news-and-media/insight/2021/09/20210910/.

[13] HKMA, inSight "Cross-boundary Wealth Management Connect in the Guangdong-Hong Kong-Macao Greater Bay Area" (dated 10 September 2021), available at https://www.hkma.gov.hk/eng/news-and-media/insight/2021/09/20210910/.