Segregation of Wealth Management Business

The HKMA's Lehman Report has made a number of recommended actions for banks to take in order to avoid mis-selling of investment products. One of the most controversial recommendations is that steps should be taken to ensure clear differentiation between traditional deposit-taking activities and retail securities business, including:

• physical segregation of banks' retail securities business from their ordinary banking business
• a requirement that staff involving in selling investment products to retail customers should not be involved in ordinary banking business
• a requirement that banks make clear, through physical signs and warnings, the distinction between deposits and investments and particularly the risks attached to the latter
• a requirement that there be complete information separation between a retail customer's deposit accounts and his investment accounts and a prohibition on a bank's making use of deposit-related information to target and channel retail customers into investment activities

HKMA also recommends that the above forms of segregation should apply to banks' insurance activities and other investment activities.

Recently I read an Finance Asia article about China's recent measures to tighten the distribution of investment-linked policies which are also prevailing in Hong Kong and vulnerable to mis-selling complaints. It is said that investment-linked policies have been a key revenue generator for China's insurance companies in the past few years. As a result of the bursting of product bubble in 2008 and widespread revelations of mis-selling, China Insurance Regulatory Commission (CIRC) is taking the following measures to revamp the way these products are sold, in order to restore consumer confidence:

• Banks are banned from selling investment-linked policies from their regular counters. They should instead put up counters dedicated to wealth management or set up wealth management centres for this purpose to prevent banking customers from confusing policies as saving products.
• The minimum premium size of these policies is raised to Rmb30,000, which might differentiate the middle-class customer who can afford to invest from the everyday customer who may not understand the risks associated with the product.
• Insurers are required to develop an internal risk rating system for their distribution channels. Staff involved in distribution should know their customers' financial status, experience in investment and risk tolerance level, and recommend a suitable product accordingly. Both customer and the sales staff are now required to acknowledge the recommendation with signatures on a legally binding document. If the staff believe a customer to be unsuitable for a product, the customer will be required to counter-sign on an endorsement of the risk assessment report.
• Distribution of investment products in rural regions is clamped down and selling of investment-linked policies by agents with less than one-year of experience is banned. All agents involved in investment-related products will be required to sit through at least 40 hours of training, while third-party distributors such as banks will have their suitability to sell reassessed every six months.

The key rationale for requiring banks to segregate their wealth management business is to make it more professional. As far as I know, some giant banks in China have already arranged their sales staff to take professional certification trainings (like CWM) to enhance their service quality.

(Extended reading: Survey identifies weaknesses in selling process)