General counsel working in China’s financial sector have endured a particularly challenging period of late. On the one hand, regulation and innovation continue to intensify; on the other hand, new concepts such as ESG and green financing also require legal departments to employ new ideas to support the research and development of financial products. On top of that, in times of uncertainty, financial institutions are increasingly looking to their GCs to play a strategic leadership role. GCs in China’s financial sector discuss how these trends are impacting their work, and what they expect the future to bring.
The financial sector is intrinsically connected to the world of business, spur-ring growth and helping enterprises take flight. As business transforms rapidly, financial institutions thus need to have a keen awareness of what parties and scenarios deserve funding. On the other hand, given their importance, risk prevention and control are also key for financial institutions.
In the past three years, China has been “fighting a tough battle to resolve financial risks.” The financial industry, which is already the subject of heightened scrutiny, now faces an even tighter regulatory environment, requiring organisations to be extremely prudent. At the same time, McKinsey has observed increasing pressure on financial institutions to rapidly launch new products. How to ensure compliance while supporting innovation has become a challenge for in-house teams.
CHALLENGING ENVIRONMENT
Founded in 2019, Everbright Wealth Management was China’s first bank wealth management subsidiary established by joint-stock banks. Li Ming, deputy general manager in charge of legal and compliance work, tells ALB that since the transition period for new asset management regulations ended at the end of last year, the implementation of these new regulations this year has triggered comprehensive and profound changes in the asset management industry.
The wealth management industry, in particular, also faces many specific new regulatory policies. In May of this year, the Measures for Management of the Liquidity Risks of Wealth Management Products of Wealth Management Companies came into effect; late August saw the promulgation of the Administrative Measures for Internal Control of Wealth Management Companies; and in December, the Notice on Regulating the Management of Cash Management Wealth Management Products is expected to be introduced, all of which affect the wealth management business in many ways.
As one of the three pillars of the financial sector, the insurance industry has witnessed its share of regulatory and policy changes. Lun Yu, head of the legal and compliance team of Generali China Life Insurance, shares with ALB that the government, while encouraging the development of the insurance industry, is also paying close attention to issues arising from new business formats.
He points out that in terms of the governance of insurance institutions, last year the China Banking and Insurance Regulatory Commission (CBIRC) issued the Notice on Carrying out Activities of “Internal Control and Compliance Management Development Year” in the Banking and Insurance Industries, emphasizing long-term efforts to rein-force internal control and promote compliance on top of periodic “fixing of shortcomings.” In addition, a slew of normative documents related to consumer rights protection, institution information technology development, performance of duties by directors and supervisors, behaviors of major shareholders, and company supervision has also been issued.
Regulation has been keeping pace with new business formats and new demands. For example, the Internet insurance business has been growing rapidly in recent years. In response, the CBIRC has issued documents to regulate the Internet personal insurance business of insurance institutions. “At present, only around 20 companies are allowed to operate Internet long-term life insurance... But in the long run, rigorous regu lation will benefit insurance companies with sound business planning and strong pricing power,” says Lun.
In the face of drastic changes, Lun shares that apart from the three key focus areas of law, compliance and anti-money laundering, the legal and compliance team of Generali China has further reinforced the requirement that “in-house counsel must go to the front-line to understand business needs, and properly handle the relationship between business development and legal compli-ance, so that the team can provide one-stop services for the company from ex-ante prevention, to interim control, to ex-post supervision and guidance.”
Li feels that changes in new regulations present both challenges and opportunities for legal and compliance work. “The team actively adapts to new regulatory requirements, and continuously strives to rely on even more professional legal and compliance services to push compliance higher on corporate agenda and empower business, which is key to surviving and thriving amid regulatory changes.”
SUPPORTING INNOVATION
Chinese society is becoming increasingly affluent, and the demands of individuals and enterprises for investment and financing continue to grow, which, coupled with the accelerated desire for new products and new business models in the “digital and smart society,” is constantly challenging the ability of in-house teams to support business innovation in the financial sector.
In this regard, Lun believes that, first of all, the in-house team needs to have a clear division of internal management. “We always practice dual legal-compliance management. Compliance management and control mainly focuses on solving feasibility issues during business innovation and R&D. Once a project is considered feasible, the legal team will come into the picture to provide operational support such as designing specific deal terms and agreements.”
The legal and compliance team of Everbright Wealth Management sets its sight on “agile compliance.” According to Li, the team mainly supports a new product in three aspects: first, “early intervention to ensure compliance,” that is, to participate in design at the onset of product creation; second, “using models to improve efficiency in the interim,” that is, to produce general contract templates for the same type of products after a new product is created to improve the efficiency of product creation.
“We always practice dual legal-compliance management. Compliance management and control mainly focuses on solving feasibility issues during business innovation and R&D. Once a project is considered feasible, the legal team will come into the picture to provide operational support such as designing specific deal terms and agreements.”
— Lun Yu, Generali China Life Insurance
Finally, there is “review and summarization of experience in the later stage,” that is, “to provide feasible solutions and advise on prohibitions for subsequent product innovation by summarizing the legal and compliance issues involved in our own product innovation and that of our peers.”
However, he also admits that despite a relatively sound process design, there are inevitably challenges in supporting the creation of new products. “The biggest challenge lies in how to accurately understand and grasp regulatory requirements. Wealth management business is an emerging field. As such, the regulatory requirements involved are being constantly updated and fine-tuned. How to accurately apply these rules to specific business operations requires accumulation of practical experience.”
Lun feels the same. To support product innovation in the insurance field, he believes that the biggest test is also “how to properly handle the relationship between business and compliance to ensure that the company always complies with laws and regulations while attempting business innovation.”
“The biggest challenge lies in how to accurately understand and grasp regulatory requirements. Wealth management business is an emerging field. As such, the regulatory requirements involved are being constantly updated and fine-tuned. How to accurately apply these rules to specific business operations requires accumulation of practical experience.”
— Li Ming, Everbright Wealth Management
For the in-house team, Lun thinks the key is to be able to correctly understand the spirits of laws and regulations. He has recently led his team in a few new initiatives, including improving technology empowerment, enhancing the visualization, intelligence, and convenience of compliance management, revising, and fine-tuning the compliance management manual, and maintaining communication with external firms and institutions to fully leverage professional expertise to seek the best solutions.
LEADING THE WAY IN ESG
With China announcing “carbon neutrality and peak carbon goals,” green economy and ESG have become hot topics in various industries in recent years. The financial sector is no exception. In fact, China put forward guiding opinions on building a green financial system as early as 2016. Therefore, supporting, and guiding ESG projects within financial institutions has also become part of the work of GCs and their teams.
Although established only three years ago, Everbright Wealth Management has already focused its attention on energy conservation and environmental protection, clean production, clean energy, ecological environment, infrastructure green upgrade and so on, and has made a series of investments in new energy, photovoltaic, energy conservation and emission reduction and other green finance-themed projects. “During this process, the legal and compliance team actively participated in the design of relevant business transaction structures and models, and prompted and strictly controlled the legal and compliance risks involved,” says Li.
In terms of wealth management products, the company has launched the “Sunshine Red ESG Industry Selection” product, a first in the industry, which explores companies with long-term investment value from the perspectives of environmental protection awareness, social responsibility, and corporate governance. According to Li, for such ESG-related products, the in-house team will, focusing on the risks of investment targets and the risk appetite of wealth management product investors, “fully take advantage of wealth management funds to promote the development of innovation-oriented enterprises, and sell wealth management products to suit-able investors with matching risk tolerance to achieve a balance between the risks and returns of such products.”
EVOLVING ROLES
With the strengthening of the above functions, the GCs and in-house teams of financial institutions have also observed constant changes in their influence within the organizations.
“It was once said that Chinese in-house counsel are largely marginalized. I beg to differ. The role of in-house counsel is unshakable.” says Lun. Speaking as a GC, “I am, first and foremost, the leader of the in-house team and must lead the team to provide swift and high-quality services; second, I am the spokesperson of my team and should speak out during the company’s daily business decision-making to convey legal and compliance opinions to other senior executives and departments; and lastly, I am also one of the makers and executors of the company’s business decisions, and need to consider opinions from multiple sides to assist the company in making the best decisions.”
As a team, Lun says that with the legal and compliance department accurately grasping key points of legal compliance and continuously contributing to key topics such as consumer rights protection, affiliated-party trans-actions, personal insurance product design, product marketing and corporate governance, “we have noticed increasing respect for and understanding of our legal and compliance opinions. In particular, front-line business units will consult us in advance, and will only carry out relevant business after receiving our affirmative responses.”
Li observes similar shifts. According to him, the increasing influence of legal and compliance teams in wealth management companies is to a certain extent due to the peculiarity of wealth management business. For example, on the investment side, “constantly innovating transaction structures is required of wealth management investment, and multiple transaction parties sometimes form civil and commercial legal relationships whose legal nature is difficult to accurately define, which means that the legal and compliance team must participate in the design of investment plans from an even earlier stage. As such, the team is becoming more influential in investment decision-making.”
The same holds true for the product side. “Whether that’s a poster, a slogan, a statement of information disclosure, or intellectual property protection for the company’s product pedigree, or the compliance matching between different products and corresponding types of assets, the legal and compliance team needs to conduct rigorous checking...
The team is indeed dispensable to the company’s business growth.” says Li.
BETTER PARTNERS
As their own roles and functions evolve, what new requirements do GCs in the financial sector have for external lawyers?
Li has a lot to share. “All bank wealth management companies are committed to creating differentiated competitive edges, and therefore will have relatively high expectations for external legal advisers in terms of product and investment innovation. They want lawyers to be sensitive to cutting-edge industry trends apart from having rich experience in the asset management industry. At the same time, more information exchange with peers is also a growing demand of wealth management companies. External lawyers can showcase their soft power by acting as bridges.”
In terms of dispute resolution, “because wealth management companies have not been in existence for a long time, major, difficult and complex disputes that may occur on the asset side are likely to have no precedent, which requires lawyers to have strong professional capabilities.” In terms of corporate governance, as wealth management companies accelerate the exploration of suitable governance systems, “there are also many gaps in this regard, and we welcome external lawyers to provide professional advice, especially advanced experience from mature overseas asset management industries.”
Lun sums up the company’s demand as “bespoke.” “In-house counsel need to take into account the actual needs of the company, especially business innovation, to carry out special identification and evaluation. As a result, in-house counsel also hope that external lawyer partners can give targeted guidance and suggestions based on the company’s actual situations. Therefore, lawyers need to have certain macro-thinking and an in-depth understanding of the development trends of the insurance industry, and be able to provide more precise and targeted suggestions in a timely manner, especially practical professional opinions with business development in mind.”
