In a significant move to deepen financial connectivity within the Guangdong-Hong Kong-Macao Greater Bay Area (GBA), as well as bolster Hong Kong’s position as an international financial centre and offshore RMB hub, Hong Kong and Mainland regulators have released revised guidelines for the Cross-Boundary Wealth Management Connect Scheme (WMC 2.0 scheme). 

The initiative, announced on 24 January this year, is part of a broader strategy encompassing six policy measures to strengthen financial integration and promote cross-boundary investment within the GBA.

In this article, we examine the amendments made to the implementation guidelines and explore the opportunities brought about by the revised guidelines, which came into effect on 26 February.

What is New? 

Broadening Participation

The revised guidelines extend eligible participants in the WMC 2.0 scheme beyond eligible banks to encompass eligible securities firms. 

In offering WMC services, a securities firm may only collaborate with other securities firms, while a bank may only collaborate with other banks.

Investors may now diversify their investment channel by investing with both an eligible bank and an eligible securities firm, or exclusively with just one eligible participating institution.

The Securities and Futures Commission (SFC) has released regulatory requirements for licensed corporations participating in the WMC 2.0 scheme, which closely align with those imposed on banks by the Hong Kong Monetary Authority (HKMA).

On 31 May 2024, the HKMA issued a further guidance allowing the Hong Kong branches of Mainland banks licensed for Type 1 regulated activity (dealing in securities) and engaging in private banking business to provide Southbound service under WMC 2.0 scheme to customers not meeting the monetary threshold for “private banking customers,” notwithstanding their private banking business model. A private banking business of a Mainland bank’s Hong Kong branch needs to notify the HKMA in advance and observe additional requirements (such as only partner with its Mainland head office as the Mainland partner bank). 

Expanding the Investor Base

The Southbound WMC 2.0 scheme now captures a wider spectrum of Mainland investors. In particular:

• (shorter residency period requirement) the minimum years of payment of social security or personal income tax in any of the nine Mainland cities within the GBA has been reduced from five years to two years; and
• (lower financial resources requirement) the financial resources requirement may now be satisfied by demonstrating an average personal annual income of not less than RMB 400,000 in the past three years.

Boosting Investment Volume

The individual investment quota under the WMC 2.0 scheme has been increased from RMB 1 million to RMB 3 million.

However, investors cannot freely allocate their investment quota between their selected bank and securities firm. Where an investor opts to invest through both a bank and a securities firm, their individual investment quota will be divided equally, with RMB 1.5 million allocated to each institution.

Diversifying Investment Options

Under the Southbound WMC 2.0 scheme, non-complex SFC-authorized funds domiciled in Hong Kong that primarily invest in Greater China equity can be traded regardless of their risk ratings. Additionally, the restrictions on risk ratings for eligible non-complex SFC-authorised funds domiciled in Hong Kong that do not primarily invest in Greater China equity have been eased, allowing for investment in relevant funds with medium-high risk levels. Importantly, high-yield bond funds and single emerging market equity funds are explicitly excluded from the list of eligible wealth management products.

Like the Southbound WMC 2.0 scheme, the restrictions on risk ratings for eligible public securities investment funds under the Northbound scheme have been eased, allowing for investment in products with risk rating of R4. Commodities futures funds are explicitly excluded from the list of eligible products. RMB-denominated deposits have also been introduced as an eligible product under the Northbound WMC 2.0 scheme.

Enhancing Operational Details

The original WMC guidelines required Southbound transactions under WMC scheme to be conducted on an “execution-only” basis unless an investor is physically present in Hong Kong. Market participants had adopted a conservative interpretation of “execution-only” in their conduct of WMC services, leading to limited promotion activities.

WMC 2.0 scheme provides further clarification guidance on promotion and sales arrangements permissible under the WMC 2.0 scheme. This is expected to instil greater confidence in banks and securities firm when devising promotion and sales strategies for their WMC services. There may remain a level of uncertainty on the extent of permissible cross-boundary marketing activities in practice.

Comparison: HKMA and SFC Regulations

The SFC’s regulatory requirements imposed on licensed corporations for the WMC 2.0 scheme closely align with those imposed on banks by the HKMA. The key differences between the regulations are as follow:

• (distributor eligibility criteria) the SFC imposes additional eligibility criteria on licensed corporations, including the following requirements:
  • paid-up capital and shareholders’ funds of not less than HK$100 million;
  • minimum of three years of experience in distributing relevant investment products; and 
  • minimum transaction volume of HK$500 million in relevant investment products during any 12-month period in the past three years; 
• (closed-loop funds flow) each participating licensed corporation and Mainland securities firm must set up an omnibus account with a Hong Kong bank and a Mainland bank respectively, which already participate in the WMC scheme; and
• (eligible products) participating licensed corporations may not offer deposits (which can be offered by banks in Hong Kong only). 

The Way Forward

Existing WMC scheme participants should review their client documentation and cooperation agreements to follow the latest guidelines. Securities firms and non-participating banks should also revisit their business strategies for business opportunities arising from the enhanced WMC 2.0 scheme to broaden their customer base in the GBA. 

Minny Siu, Partner, and Richard Mazzochi, Partner and Head of Banking and Finance Hong Kong, King & Wood Mallesons