The past couple of years has been a period of leapfrog growth for the trust sector. At the end of June 2017, the assets under management (AUM) of 68 trust companies in China reached more than RMB23 trillion (US$3.46 trillion). Despite their popularity among investors, owing to security and high returns, trust products have been perceived as mysterious in China due to the lack of a unified trust registration system.
Now those days are gone. On 30 August 2017, the China Banking Regulatory Commission (CBRC) issued the Notice on Circulating the Measures for the Administration of Trust Registration, which structured a unified trust registration system for the trust sector. As the Measures for the Administration of Trust Registration took effect on 1 September 2017, the underlying trust registration system was formally introduced on the same day, marking a milestone in the history of the trust sector.
Since the implementation of the Measures from 1 September, the number of trust registration transactions of various categories has been steadily rising. According to data from the official website of China Trust Registration (China TRC), as at 30 September, its system had received more than 4,000 applications for trust registration from 68 trust companies across the country, which included more than 3,700 related to preliminary registration and more than 300 to initial registration, as well as the first applications for alteration registration and corrective registration, respectively. More than 3,500 trusts were assigned the exclusive code through the system. At the date of writing this article, the basic particulars of 79 pooled trusts had been published on China TRC’s website.
The measures are intended to be binding upon all trust institutions that are duly incorporated. The information required for registration includes a description of the trust, beneficial interest in the trust, any other details prescribed by the CBRC and any updates. Before issuance and inception of the trust, the trust institution should complete preliminary registration procedures, where an exclusive product code is assigned to the trust. After inception or effectiveness of the trust, the trust institution should complete initial registration procedures for the trust, and its beneficial interest, within the prescribed time limit. Upon any significant change to the registered information during the term of the trust, or upon termination of the trust, the trust institution should complete alteration or termination registration procedures promptly.
China TRC is allowed, for each trust beneficiary, to open a beneficiary account that records the beneficiary’s beneficial interest in the trust and any changes. Unlike trust registration procedures, the beneficiary account will be opened only upon voluntary request by the settlor or beneficiary, but the procedures are required to be completed by a trust company or any other financial institution on their behalf. The account has to be held in the settlor or beneficiary’s own name, and any civil subject is allowed to open only one trust beneficiary account. The beneficiary is allowed to check the account for information about his or her beneficial interest in the trust, or cancel the account. The exclusive account number and account opening notice will be issued immediately after the account is opened.
Protecting investment income of trusts. The measures have filled in the gap of trust registration in China. The trust registration system structured under the measures, laying a basis for the development and regulation of the trust sector, is conducive to identifying critical elements of trusts, defining rights and duties of parties concerned and establishing an authoritative information disclosure mechanism that is efficient and well regulated. It requires that all trusts must be registered and assigned the exclusive product code, and in the case of pooled capital trusts, public notification process must be completed.
Using the trust registration system to identify legitimate trust institutions and products, investors may avoid being cheated into dealing with false institutions or products. Allowing access to information about what and how the trusts are permitted to invest, and the level of risks that they take, the system helps mitigate information asymmetry. The services provided by China TRC to beneficiaries of trusts, including but not limited to opening of beneficiary account and providing access to information about shares of beneficiary interest in the trusts, are also conducive to protecting legitimate rights and interests of beneficiaries at source.
Strengthening regulatory capabilities over trusts. Regulation over the trust sector is being implemented with poor cost-efficiency, preciseness and timeliness, given the scattered regulatory data attributable to the variations in the construction progress of internet-based systems for the sector. Registration of trust products will enable the construction of a centralized, integrated trust database that helps meet the need for better regulatory analysis. With such a database, regulators will be better able to identify the development trend of the sector, implementing regulation in a more forward-looking and effective manner so that sector risks can be effectively prevented. As for trust companies, heightened regulation will drive them to improve their products continually, bringing about development in the trust sector.
Driving liquidity of trusted assets. Trusted assets have been unattractive to investors due to their poor liquidity; in plain words, the difficulty to convert trusted assets to cash. The implementation of a trust registration system will be conducive to building a well-regulated marketplace for dealings in trust products, which in turn boosts the issuance and trading of trust products, transfer of beneficiary interest in trusted assets, and eventually, general liquidity of trust assets. Adding channels and resources for investment, it will help achieving risk diversification. Ultimately, it will contribute to the intensive development of the trust market, making the sector better positioned to serve the real economy.
Ensuring development of the trust sector. Aimed at improving infrastructure construction within the trust sector, raising transparency and rationalization of the trust market and procuring players in the sector to accept social supervision, the measures will help improve social awareness of the trust sector, driving its robust development in the long run. The registration of trust products is also expected to lay a cornerstone for two more systems to be implemented in the future, namely, pledge of beneficiary interests in trusts and registration of trusted assets.
Wu Jiayin is a partner at Boss & Young