Scandals set off watchdog warnings

Shanghai's banks told to set up complaint hotlines to protect investors after sales of failed wealth products and other irregularities

PUBLISHED : Friday, 25 January, 2013, 12:00am
UPDATED : Tuesday, 23 January, 2018, 11:43am

Shanghai's banking regulator has told lenders to set up telephone hotlines for complaints about staff misconduct in selling wealth management products.

The move is seen as a gesture towards protecting consumer rights after a slew of irregularities in the banking sector.

The Shanghai branch of the China Banking Regulatory Commission (CBRC) and the city's banking association also told customers to report bank employees involved in the underground financing market, another risk highlighted by the CBRC.

The regulator warned banks in Shanghai to "improve risk management" and "find a balance between business expansion and risk prevention", according to bankers attending a CBRC meeting last week.

The demands came after a former employee at a Shanghai branch of Huaxia Bank allegedly promoted an unauthorised wealth management product that later failed.

The default resulted in depositors losing several hundred million yuan. Dozens of investors protested at the bank last month, generating concerns about social stability.

In another scandal reflecting banks' lax management of their branches, Ma Yijiang, former deputy head of a Shanghai Pudong Development Bank branch in Zhengzhou, Henan province, allegedly used 6.4 billion yuan (HK$7.9 billion) in depositors' money to fund loan-sharking schemes in the underground financing market and run other illegal businesses.

A Henan court heard the case earlier this week.

Mainland banks were facing mounting risks this year from borrower defaults; off-balance-sheet businesses, including wealth management products; and the underground financing market, the CBRC said last week.

With little transparency in asset allocation, wealth management products were prone to manipulation, analysts said. In the case of Huaxia Bank, the lender said it did not know former employee Pu Tingting distributed the products to clients and kept the latter in the dark about the money flowing to a private equity fund.

May Yan, an analyst at Barclays Capital, said the CBRC was expected to tighten issuance of wealth management products and require more detailed disclosure about asset allocation as well as compulsory risk assessment tests of retail customers.

"Regulators should also work on clarifying banks' responsibility in non-principal-guaranteed sales and distribution [of wealth management products]," she said.

The CBRC initially suggested Huaxia Bank reimburse the affected clients, but the proposal was opposed by many lenders. Arrangements have been made for the product's guarantor, Zhongfa Investment Guarantee, to repay the principal.

A stronger measure could be to ask lenders to put non-principal-guaranteed wealth management products on to their balance sheets, something that seems unlikely in the near term, according to Yan.

"Putting the [products] on the balance sheet would curb the off-balance-sheet lending size, and might cause some extra provisioning, which might have a minor impact on banks' earnings," she said.