October 2022
Di Wu and Teresa Huang
On August 22, 2022, the China Banking and Insurance Regulatory Commission (hereinafter referred to as the “CBIRC”) issued by Order No. 4 of 2022 the Measures for the Administration of the Internal Control of Wealth Management Companies (hereinafter referred to as the “Measures”), which shall come into effect on the date of issuance.
The Measures consist of six chapters and 46 articles. This article will focus on the main compliance obligations of wealth management companies after the implementation of the Measures.
1. Organizational Structure
The Measures stipulate that a wealth management company shall establish an organizational structure for internal control with a reasonable division of labor, unequivocal responsibilities, and checks and balances.
Specifically, the board of directors of a wealth management company shall designate a specific department as the internal control functional department to take the lead in the overall planning of the internal control system, organizing implementation, making inspections and assessments, and urging corrective action, and shall establish a chief compliance officer at the senior management level.
2. Internal Control Activities
The Measures provide that a wealth management company shall establish and improve a system of internal control rules, formulate comprehensive, systematic, and well-regulated business rules and management rules for various business activities and management activities, and conduct a comprehensive assessment at least once a year.
Specifically, a wealth management company shall establish systems for the management of the design of wealth management products, systems for the management of the duration of products, systems for the management of wealth management accounts, systems for the management of the sales of wealth management products, systems for the management of the authority to make investment decisions, systems for the management of the investment of wealth management funds, systems for the management of the wealth management product investment accounts, systems for the management of wealth management investment cooperative institutions, systems for the abnormal transaction detection, systems for insider information management, systems for the prevention and control of conflict of interest, systems for connected transaction management, systems for information isolation, systems for third-party independent custodian for wealth management products, systems for the management of risk reserves, and systems for protection of investors’ rights and interests and other business management systems.
In addition, a wealth management company shall take corresponding internal control measures in accordance with the Measures when carrying out investment and trading activities, and shall also comply with the requirements of the Measures in terms of post management and security management, and shall abide by anti-money laundering related laws and regulations.
3. Internal Control Assurance
The Measures stipulate that a wealth management company shall strengthen the informationization, process and automation of the management of various business sectors, establish and improve business and management systems that are safe, compliant, efficient, reliable and compatible with internal control, and provide technical assurance and system support for the effectiveness of internal control.
Specifically, a wealth management company shall effectively prevent risks such as network intrusion, information leakage, data tampering, system unavailability, etc., and ensure the confidentiality, integrity, authenticity and resistance to repudiation of data in various business sectors; establish and improve systems for the management of investor information processing, handle investors’ personal information in accordance with the law, and protect investors’ personal information security; improve the data quality control system and process, designate dedicated departments responsible for data quality management to ensure that data information is true, complete, continuous, accurate and traceable, and not reported late, omitted, misreported or concealed; establish and improve the accounting and valuation system to truly and accurately reflect the business transactions, and confirm and measure the net value of wealth management products.
In addition, a wealth management company shall reasonably set internal control assessment standards, and its internal control functional departments shall carry out an assessment of internal control activities of each department and personnel at least once a year, as well as incorporate internal control into the training plan and ensure that each person receives no less than 20 hours of internal control training per year, so as to guarantee the implementation of the internal control system.
4. Internal Control Supervision
As to supervision, the Measures require that the internal audit department of a wealth management company shall conduct an internal control audit and assessment at least once a year and submit the audit and assessment report to the board of directors and the supervisory board, and shall submit to the CBIRC and its local offices before April 30 of each year the internal control report for the previous year that has been considered and approved by the board of directors. The report shall include: the implementation of internal control, assessment results, rectification and improvement, audit and assessment report and other materials required to be submitted by the CBIRC and its local offices.
From the perspective of regulators, the head of the CBIRC believes that the formulation of the Measures is a refinement and supplement to the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions, the Measures for the Supervision and Administration of the Wealth Management Business of Commercial Banks, measures for wealth management companies and other relevant regulatory regimes, and is conducive to promoting wealth management companies to establish and improve a unified and standardized internal control standards. And from the perspective of wealth management companies, wealth management companies shall evaluate their internal systems and business practices as soon as possible, and rectify anything inconsistent with the provisions of the Measures as quickly as possible to avoid suffering from regulatory measures or administrative penalties. In order to urge companies to rectify as quickly as possible, the Measures also provide for a transitional period of six months from the date of implementation, during which companies can rectify non-compliance as soon as possible.
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