Stringent regulation has remained a theme in the financial industry this year, and the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (the New Rules), which the regulators issued on 27 April 2018, are a significant milestone and have a major impact on the bank-trust cooperation business. This column proposes to examine risk controls in, and the direction of transformation of, the bank-trust cooperation business under the New Rules.
The definition of “bank-trust cooperation” is first seen in the Guidelines for Bank and Trust Company Business Cooperation. With the evolution of the bank-trust cooperation model, the scope of bank-trust cooperation business is also expanding. The Notice on Regulating Bank-Trust Business also incorporates banks’ on balance-sheet funds and beneficial rights into the bank-trust business and defines bank-trust channel business for the first time.
The term “bank-trust business” refers to the act whereby a commercial bank, as the client, entrusts on and/or off-balance-sheet funds or assets (beneficial rights) to a trust company to invest in or establish a fund trust or property right trust. In turn, the trust company carries out management, application and disposal thereof in accordance with the trust documents. Based on the different roles of the bank and the trust in the management, application and disposal of the trust property, bank-trust cooperation business may be divided into the following:
Bank-trust channel business. Here, both the fund end and asset end come from the bank and the attendant risks are likewise mainly borne by the bank, with the trust charging a certain channel fee only as the channel. This business may be further divided into channel finance business and channel investment business, with the former being the more common.
Active management business. In this segment, the trust is usually responsible for the asset end and the bank for the fund end. Given that the trust bears the major risks of the project, the trust’s remuneration rate in the active management business is relatively high. Depending on its orientation, the active management side of the bank-trust cooperation business can further be divided into active finance business and active investment business.
Miscellaneous bank-trust cooperation business. In addition to the above-mentioned bank-trust channel business and active management business, banks and trusts also cooperate in intermediary business stages, mainly including trust product sales business, as well as fund custody and clearance business, etc., conducted in accordance with the Administrative Measures for the Pooled Fund Trust Plans of Trust Companies.
Issuance of the New Rules has placed stringent regulatory requirements, such as elimination of multi-level nesting and channels, prohibition on mismatching of terms, shattering of rigid payment, etc., before the entire asset-management business. The impact felt and the major risks to be controlled by, and the direction of transformation of bank-trust cooperation business are as set forth below:
Firstly, under the high-pressure trend of the regulators strengthening concerted oversight of multi-level nesting and channel business, the bank-trust channel business will gradually shrink. So, trust companies should enhance their active management capabilities and put greater emphasis on developing their active management business:
- The elimination of multi-level nesting will make the past channel model – designed to circumvent restrictions through multi-level nesting and concealment of the source of funds or the investment target of the assets (e.g., the typical channel model wherein bank wealth management invests in trust loans or entrusted loans through a nested asset management plan) – no longer feasible;
- The prohibition on mismatching of terms will make it impossible for the majority of short-term bank wealth management to match up with trust products; bank wealth management characterized by relatively low costs will suffer shrinkage and cause the funding costs of finance business to increase. As such, if a trust company is unable to pass on fully the increased interest-rate costs, it may cause its trust remuneration rate for certain finance business to narrow;
- With bank and securities broker non-standard financing subject to numerous regulatory constraints, we anticipate that such demand will turn towards trusts; the increase in asset end supply and the tightening in fund end supply will, to a certain extent, be conducive to enhancing the price negotiation space and remuneration rate for trust companies’ active-management business;
- The prohibition on rigid payment will cause trust companies to be more prudent in asset selection and risk control, which will be conducive to the long-term healthy growth of the trust industry; trust companies with outstanding active-management business capabilities should be able to secure more funds and enhance their market shares.
Secondly, asset securitization and other compliant passive management business are not affected by the effort to eliminate the channel business, and the vigorous promotion of asset securitization business cooperation is also one of the emphases in the direction of transformation. Article 3 of the New Rules specifies that, “these opinions shall not apply to the asset-securitization business launched in accordance with the rules issued by the financial regulator nor to pension products offered in accordance with the rules issued by the human resources and social security authority”.
Accordingly, the asset-securitization business, characterized by risk isolation, genuine removal of assets from the balance sheet and standardized features, as well as compliant affairs management business, such as charitable trusts, family trusts, etc, are not affected by the effort to eliminate the channel business and remain a business direction the development of which is encouraged by the regulators.
In short, banks and trusts are both subject to the oversight of the China Banking and Insurance Regulatory Commission and both have strengths that are beneficial to the other in their business cooperation. With the extensive development of the financial market, the bank-trust business cooperation model is continuously becoming more rounded. Under the stringent requirements of the New Rules, bank-trust cooperation business will also be strongly impacted. Risk control in, and the direction and model of transformation of, bank-trust cooperation business and their respective future positioning and development space are worth further attention and exploration.