The latest addition to the Connect Scheme, Wealth Management Connect, has been jointly announced by the People’s Bank of China, the Hong Kong Monetary Authority (the “HKMA”) and the Monetary Authority of Macao on 29 June 2020 (the “Joint Announcement”).

 

The new Wealth Management Connect scheme will be a pilot scheme and promises to facilitate cross-boundary investment by individual residents in the Guangdong-Hong Kong SAR-Macao SAR Greater Bay Area (the “GBA”) by allowing GBA residents to open and operate cross-boundary investment accounts directly with banks in the GBA.

 

The implementation date and many technical details of the scheme are yet to be announced as the three authorities are currently working together to refine the specifics. However, the Joint Announcement, along with commentary from HKMA Chief Executive Eddie Yue, give an overview of what this new scheme will bring and how it will break new ground.

 

What do we know so far?

 

Northbound and Southbound. The scheme has a southbound and a northbound component.

 

  • The Southbound Wealth Management Connect allows residents of nine Mainland cities in the GBA to open designated investment accounts with banks in Hong Kong and Macao in order to invest in eligible investment products distributed by these banks; and

  • The Northbound Wealth Management Connect allows residents of Hong Kong and Macao to invest in eligible wealth management products distributed by Mainland banks in the GBA by opening designated investment accounts with these banks.

    Phased approach. The Wealth Management Connect scheme will be introduced in a phased approach, starting with more cautious parameters which may be further expanded in the future.

     

Low risk and simple products. In the initial stages, the product scope will consist of mainly low-risk, simple investment products.

 

Closed-loop cross-boundary remittance. Cross-boundary remittance under the scheme will be conducted and managed in a closed-loop through the bundling of designated remittance and investment accounts to ensure that the relevant funds will only be used to invest in eligible investment products.

 

Currency conversion. Cross-boundary remittances will be carried out in renminbi, with currency conversion conducted in the offshore markets.

 

Aggregate and individual quotas. Cross-boundary fund flows under Northbound and Southbound Wealth Management Connect will be subject to aggregate and individual investor quota management.

 

Regulator coordination and investor protection. The scheme will involve coordination by the authorities to find common ground and policy space within the three different regulatory regimes, with an emphasis on investor protection. Memoranda of understanding will be entered into by regulators in the PRC, Hong Kong and Macao to establish a supervisory cooperation arrangement and liaison mechanism in order to protect investors’ interest and maintain orderly and fair trading. 

 

How should the industry prepare?

 

The HKMA’s Eddie Yue notes “In the coming months, we will engage our regulatory colleagues across the boundary and stakeholders in the financial industry to finalise the implementation details, in the hope of rolling out the scheme before long.” As part of preparations for the formal launch of the pilot Wealth Management Connect scheme, we list below some points which interested industry participants can start thinking about. 

 

Investor eligibility requirements 

 

The Joint Announcement refers to “individual investors” being able to invest through Wealth Management Connect. There have been reports that the scheme will also have a minimum assets requirement for PRC residents of RMB50,000.

 

  • Will there be further eligibility requirements, potentially as part of the phased implementation?

  • What requirements individuals must meet in order to be eligible as GBA resident individuals (for example,

    identity card and current residential address)?

  • Will individual investors be able to open accounts using arrangements such as personal investment companies, trusts or family offices?

    Specific investor eligibility requirements will require new procedures and controls in place if banks wish to provide the Wealth Management Connect service to their clients. 

 

Product scope 

 

No details have been given as yet on what types of products constitute “low-risk, simple investment products” – we assume for now this would exclude products that would be classed as “complex products” under the Hong Kong regulatory regime (for example exchange-traded derivatives). However, could this scheme permit instruments such as certificates of deposit and exchange-traded funds? 

 

Existing FX and transfer quotas 

 

Under existing regulation by the State Administration of Foreign Exchange, Mainland domestic individuals are subject to an annual quota of US$50,000 for foreign currency conversions or purchases relating to capital account items. On the other hand, Hong Kong individuals currently may only transfer up to RMB80,000 per day to an account in the Mainland. On the basis that cross-boundary remittances under the scheme will be managed in a closed-loop as described above and cross-boundary remittances will be carried out in renminbi only, it remains to be seen whether these existing quotas would apply to the Wealth Management Connect scheme but it seems to make more sense that they should not. 

 

Investor protection 

 

The Joint Announcement notes that the scheme “will be governed by the respective laws and regulations on retail wealth management products applicable in the three places with due regard to international norms and practices”. Eddie Yue’s commentary refers to finding common ground between the three regimes. Will this result in a specific set of rules for Wealth Connect which may “switch off” some of the investor protection steps specific to particular jurisdictions? If so, this raises once again the potential requirement for firms to have a new set of systems and controls which would apply to Wealth Management Connect customers.

 

Also, how will the scheme address issues such as mis-selling legislation? The Joint Announcement notes that “Relevant regulators in the Mainland, Hong Kong and Macao will each take necessary measures to establish effective mechanisms under Wealth Management Connect to tackle, based on the principle of territorial administration, any illicit activities in a timely manner, with a view to protecting the interest of investors.” (emphasis added). Could this mean that issues such as mis-selling will be dealt with on the basis of the laws of the home jurisdiction of the product distributor? If so, will there be additional disclosures which will have to be provided to clients? 

 

Quotas 

 

What mechanisms will be in place to ensure that the individuals remain within their quota? For example, will individuals be limited to opening a main remittance account with just one GBA bank in their residence city who will be responsible for ensuring they do not breach quota limits, while allowing such individuals to purchase products from multiple banks across the border, or will individuals be allowed to open multiple remittance accounts with multiple GBA banks in their residence city? Will banks need to have established agreements, networks or relationships with other GBA banks in order to permit the arrangements?

 

Once individuals have set up an investment account, will it be possible to change the provider and transfer assets directly from one investment provider to another, or will there be a requirement to repatriate funds back to the remittance bank first before switching? If individuals are not limited to opening a “main” remittance account with a single bank, what measures will be in place to manage an individual’s quota (for examples, disclosures or certification)?

 

This may require potential systems changes in order to have quota limits programmed within the banks’ systems and controls, potentially including restrictions such as “sell only” once quotas are met. 

 

 

For further information, please contact:

 

Chong Liew, Partner, Linklaters

[email protected]