Wealth-management products - once the darling of China's banking industry - are the subject of heated complaints from dissatisfied customers as the stock market declines.

The nation's banking regulator has stepped in to clean up the industry, and listed the main problems encountered in the sector.

The China Banking Regulatory Commission has ordered banks to check their wealth-management products for irregularities, and report to the regulator before May 30.

The commission's Shanghai bureau has also investigated the products offered by banks, and has sent its report to the national watchdog.

Banks will have to suspend their products if irregularities are found, and managers in charge of the sector will lose their jobs if they don't iron out the glitches.

Some products have so far gained sluggish returns, and the regulator is probing questionable marketing practices - some bankers have emphasized possible returns without mentioning the risks involved.

Shanghai Pudong Development Bank was the first to catch the attention of regulators with its wealth-management products. Then more banks were identified by local media reports as having sold packages with sluggish performances.

More examples can be easily found while global stock markets are tumbling amid the fallout from the United States subprime credit crisis since last year.

Marketing techniques

It's no surprise to see shabby performances by financial products as share values fall. Markets do go up and down, and investors - individuals and institutions alike - should take the consequences.

But the regulator is investigating whether some banks have exaggerated the returns on their products and sold them to clients who can't afford exposure to high-risk investments.

"There are no bad products but the question is whether you sell them properly," said an unnamed banker. "The question is not whether it is right to sell high-risk products, which is common overseas, but whether you sell a high-risk product to the right client. The problem is when a high-risk product is sold to investors with high vulnerability."

When the market is good, everyone is happy. However, when the golden times fade away, some problems are exposed.

That's why complaints have mounted and the regulator has stepped in.

More detailed regulations have been issued over the design, marketing and information disclosure of products, client valuation, management, and complaint mechanisms for clients.

Banks have to set a threshold of 50,000 yuan (US$7,143) for investment in wealth-management products to rule out small-cap investors who are vulnerable to risks.

Banks are also banned from selling de facto overseas funds, which has been a common practice, especially by foreign banks.

The regulator also singled out products linked to stocks, and requires banks to avoid misleading clients.

Banks are banned from marketing their products through the Internet or by telephone. They must also post the figures on worst-possible scenarios on the first page of marketing leaflets, and highlight these in an eye-catching way.

Banks must also reword their advertising to include phrases such as "expected returns" or "highest returns," the regulator said.

Banks are also required to clarify that their previous performance on related products doesn't necessarily mean that new products will enjoy the same returns.

Disclosure on investment results is also tightened. They must inform clients directly, rather than just posting returns on the bank's Website.

Banks prefer to offer more stable returns amid the uncertain share market.

"We will launch easy-to-catch wealth management products to individual clients," said Guo Xiaokai, an Industrial Bank manager of individual wealth management. "These products with a more sophisticated investment mechanism may be offered to institutional players."

(Shanghai Daily May 5, 2008)