The landscape of the financial services industry is undergoing significant transformation in response to regulatory shifts impacting unlicensed banks, often referred to as non-licensed banksThe regulation mandating a reduction in proprietary wealth management scales is steering these banks towards innovative strategies aimed at retaining client loyalty and adapting to a more competitive environment.

In the bustling banking sector, particularly within regions with a heightened regulatory focus, non-licensed banks are throwing their energy into exploring new routes for survivalTraditional strategies of wealth management are losing traction as the competition for licenses from wealth management firms intensifiesDespite this, there remains a strong drive to maintain client engagement through alternative avenues such as forming distribution partnerships and jointly developing financial products

For instance, these banks are increasingly likely to team up with established wealth management companies, creating a connect that amplifies product offerings—both for themselves and their partners.

While many banks remain undeterred in their quest for wealth management licenses, they are also preparing for the eventual reality of not obtaining these critical assetsThis preparation includes considering structural reductions in the scale of their wealth management offerings while actively seeking new distribution resourcesThe management teams of these banks understand that it is crucial to have alternative strategies in place—a combination of proactivity in license applications and the strategic partnership model is essentialAn asset management department head from a southern agricultural bank, which boasts a wealth management scale exceeding RMB 70 billion, mentioned ongoing negotiations with various wealth management companies to explore diverse collaboration models.

The regulatory environment has tightened significantly this year, with authorities implementing more stringent controls on wealth management practices across the board

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Non-licensed banks face explicit restrictions that not only mandate a downsizing of self-operated wealth management assets but also prohibit the use of smoothening mechanisms like trust schemes and closing price valuation methodsConsequently, many banks are on their toes, executing contingency plans that encompass proactive license applications while re-evaluating their asset management strategies.

These tensions give rise to an interesting dichotomy for banksThe asset management head at one of the major agricultural banks, with total assets over RMB 400 billion, expressed this predicament well: clients are clamoring for more wealth management products, often urging the bank to raise available quotas while the regulators impose a strict ceiling on growthIn this environment, non-licensed banks are tacitly encouraged to delve into alternative channels of wealth management distribution—thereby creating a balancing act that is critical to navigate.

Within this partnership approach, two primary avenues have emerged for collaboration with wealth management firms

The first is the transition of proprietary wealth management products to a pure distribution modelHere, non-licensed banks would act merely as distribution platforms, devoid of any management role over the products they sellThe second avenue involves a more collaborative creation of customized wealth management offerings based on shared resources and client insightsAs non-licensed banks navigate this transition, it’s anticipated that smaller banks or those less likely to achieve a wealth management license will intensify their efforts in establishing distribution arrangements, intensifying competition in the market.

Despite the appearance of a balanced approach through joint product development, some industry experts express a degree of caution regarding the underlying asset identification risks inherent in such partnershipsThere are concerns about how effectively non-licensed banks can ensure thorough due diligence on underlying asset quality when collaborating with wealth management firms.

Several executives voiced the need for heightened scrutiny toward the risk profile associated with the assets being promoted

For instance, some distribution entities insist on regular disclosures from their wealth management partners, requesting detailed information concerning the underlying assets at intervals to mitigate reputational risksThe financial head from one southern agricultural bank emphasized how essential it is to manage these risks as they align with wealth management firms for product distribution.

As tempting as the joint product development model may appear, it brings forth challenges in transparency and accountabilityThe experts argue that non-licensed banks can potentially leverage these partnerships simply by affixing the names of the wealth management firms to the products while retaining ownership and management of potentially risky underlying assetsConcerns are rising about this dynamic, especially in an environment where clients expect the financial firms they engage with to actively oversee and manage asset risks.

Furthermore, the specific expertise of non-licensed banks in local credit conditions creates a risk of asset concentration

They may likely select regional debt opportunities as they have greater insights into local yield factors and credit spreadsConversely, wealth management companies need to evaluate the inherent credit risks associated with these characterized assetsMany wealth management companies lack comprehensive local expertise, placing them at a disadvantage when it comes to understanding the nuances of the underlying asset landscape.

Amid these evolving strategies, a noteworthy concern remains regarding potential over-concentration of assets within defined geographical areasExecutives have pointed out that when creating a shared whitelist for assets, there is inherent risk that such initiatives can inadvertently favor regional assets over potentially higher quality options available across the national landscape.

The intersection of regulatory scrutiny and financial strategy is a delicate balancing act for non-licensed banks