China tightens fund distribution standards

Distribution has always been regarded as the weakest link in ChinaÆs booming fund industry; now the CSRC is seizing supervisory power over the sector from the CBRC.
The fund supervisory division of the China Securities Regulatory Commission (CSRC) says it is acting to tighten the regulation and monitoring of fund sales activities. The regulator says it will send out officers from 36 of its units to conduct on-the-spot inspections of fund distributors across China between September and December this year.

The officers are expected to run thorough investigations and report back to Beijing on matters that include embezzlement of client money, internal risk management systems, potential breaches in IT systems, data management, misrepresentation of fund products in client interaction and product brochures, marketing materials, standards of investor education, and compliance with examination and licensing requirements.

The CSRC says it is keen to ensure the sustainability of the mutual fund industry over the long run. It says the purpose of the checks is to tighten standards among fund distributors. It wants to enhance the level of internal risk management, information disclosure and client interaction, and investor education.

Fund sales units in commercial banks are expected to be most affected. Previous estimates by AsianInvestor suggest that banks control between 80% and 90% of all fund sales in China. The remainder of the market is covered by securities brokerages across the country. Fund management companies also have a small share of the market by providing their own direct sales services.

The CSRC has issued eight checklists for distributors so that they can familiarise themselves with the requirements of the inspections and clean up their acts ahead of the tightening. The circulars do not say what might be the possible consequences in the event that a distributor breaches the rules.

Industry observers, who did not want to be identified in this story, say the CSRC is stepping up its control of the fund industry and cleaning up the disarray caused by the China Banking Regulatory Commission (CBRC) circular issued in April that criticised banksÆ wealth management practices.

Previously, the CSRCÆs power only applied to activities within fund houses, while the CBRC oversaw bank operations. The CSRC had no say on how banks should act when distributing funds û a situation that caused much murkiness in the industry and led to widespread mis-selling of fund products.

In a previous interview with AsianInvestor, officials at the CSRC acknowledged that bank distribution has been the industryÆs weakest link. ChinaÆs frenzy over qualified domestic institutional investor (QDII) funds demonstrates that point. This correspondent reported in the October issue of AsianInvestor that on the day of the inaugural launch of QDII, bank staff across Beijing were eager to make sales pitches but were unable to provide product brochures or even give advice on investing in an overseas fund.

Sources say widespread misrepresentation and gross mis-selling last year has given QDII funds a bad reputation. While China Southern and China International were able to raise multi-billions of dollars within hours last year, most fund houses are now struggling to garner interest from their banking partners to carry their fund products.

Cleaning up the industry will certainly enhance business sustainability over the long run. But, sales personnel say the CSRC crack-down is only going to add to their woes which have been compounded by the poor performance of equities across the globe.
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