The dynamics of the financial services landscape can often illustrate the intricate balancing act that banks face in striving to meet regulatory requirements while serving their clientele effectivelyA pertinent example of this is found in the evolving practices of non-licensed banks in China, especially in the wake of regulators asking banks to scale down their proprietary wealth management operationsThis directive has led to several institutions, lacking a licensing framework for wealth management, seeking new avenues to maintain customer loyaltyTheir strategies include applying for licenses, creating distribution channels for third-party products, and collaborating with licensed wealth management firms.

The landscape of banks without licenses varies significantly, resulting in diverse approaches towards product creation and service deliveryFor instance, when discussing joint creation of wealth management products, industry insiders have expressed concerns that such offerings often merely carry the reputable names of licensed firms while the underlying assets are still managed by the unlicensed banks

The implications of this are profound, particularly regarding the capability of wealth management companies to adequately assess and identify these underlying assets.

Exploring New Growth Avenues

Despite intense competition for wealth management licenses among companies, some financial institutions remain determined to engage in the licensing processAn executive from an agricultural commercial bank in southern China remarked that they are persisting with their license applications, while also contemplating solutions should their efforts not bear fruitThese solutions include enhancing distribution networks and selectively reducing the scale of their proprietary wealth management offeringsNoteworthy too is the bank's reported wealth management scale exceeding 70 billion yuan, positioning it well amidst the non-licensed banks.

In recent months, the tide has turned as regulatory scrutiny has intensified

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Regulations forbidding the use of trust mechanisms to smooth returns and mandates for licensed banks to control their wealth management scale have proliferatedInstitutions have been required to make substantive reductions in their wealth management operations in preparation for a broader directive set for culmination by 2026. Consequently, banks are preparing on multiple fronts, from actively pursuing licenses to restructuring wealth management offerings and exploring new collaborative models with licensed companies.

The current landscape boasts 32 banking wealth management firms, including those from state-owned banks, joint-stock banks, city commercial banks, rural commercial banks, and joint venturesA noteworthy slowdown in approvals for new wealth management entities has been observed since 2022, with only two entities licensed previously, and a further slowdown into 2023, where only one new firm received approval

This has left many small to medium-sized banks reeling while trying to secure a position for themselves in the market.

Amidst this regulatory pressure, the banks are caught in a perplexing situationOn one hand, they feel compelled to respond to local demand for wealth management solutions, a demand that is clearly apparent as their products are met with enthusiastic client requestsOn the other hand, they are restrained by explicit regulations limiting further growth in their wealth offeringsThe asset management department head of a medium-sized agribusiness bank noted the urgency of the situation where a substantial amount of existing wealth management assets, worth trillions, is set to enter a phase of reduction or elimination.

In addition to pursuing licenses, non-licensed banks are striking collaborative agreements with licensed wealth management companies, focusing chiefly on two arrangements: converting proprietary wealth management into distribution for third-party products or referring their customer base to wealth management firms for jointly developed customized products.

High pressure surrounds the competition in the wealth distribution market as banks ramp up their efforts to secure distribution channels amid an environment increasingly dominated by compliance needs

The complexities of risk management, the necessity for professional expertise, and achieving a sustainable volume of transactions become paramountHowever, some institutions remain at a disadvantage without the requisite scale to engage effectively.

Enhancing Distribution Capabilities

A multifaceted push is underway for enhanced collaboration with licensed wealth management firmsSome executives have highlighted this critical juncture, reflecting on the escalating competitiveness that marks the landscape of retail financial productsThere is a growing acknowledgment that while the large state-owned banks command substantial assets under management, their reluctance to capitalize on distribution partnerships hampers the competitive edge relative to small banks seeking advantages in customer engagement.

Looking at the data, in the first half of this year, over 500 firms participated in selling wealth management products generated by licensed entities, illustrating a marketplace that's not just expansive but competitive

The trend indicates a notable increase in engagement with licensed companies, especially as small banks work to establish their footing in a market with complex regulatory barriers.

Distributors face additional hurdles when trying to establish partnershipsThere are critical phases in project onboarding and product approvals that require thorough due diligence processes and stringent evaluationsMany licensed wealth management firms leverage rigorous standards, often setting high benchmarks for the selection of distribution partners.

For unlicensed banks, the collaboration with licensed firms can be precarious, considering their assets and the inherent complexities of underlying financial instrumentsConversations with various stakeholders indicate a cautious approach is necessary to ensure they remain viable in navigating myriad levels of regulation while exploring new product offerings.

Challenges in Asset Visibility

There is palpable concern that, even in shifting to a distribution model, the potential risk of underlying assets demands careful scrutiny

The asset management executive from a sizable agribusiness bank underscored the importance of ensuring robust measures are in place to mitigate reputational risks that could stem from inadequately vetted product offerings.

As the industry increasingly adopts a net value-focused approach to financial products, potential risks associated with leveraging a licensed firm's name for unlicensed banking operations becomes more apparentThis concern pivots around the disparity of responsibility regarding the management of funds and the evaluation of credit risk associated with the financial productsMany believe that without a meticulous vetting process, the reliance on non-licensed banks for product development might invite unforeseen liabilities that weigh heavily on both parties' reputations.

Furthermore, establishing a shared investment strategy with wealth management firms, while seemingly beneficial, may inadvertently concentrate asset risks regionally, favoring local entities that may not align with the broader market's liquidity needs