Jun 30, 2017 06:55 PM

Caixin Explains: Five Things to Know About New Investor Protection Rules

After a decade of planning, market consultation and piecemeal execution, the China Securities Regulatory Commission (CSRC) has finally made it compulsory for all securities and futures brokerages and fund companies to perform a suitability assessment on investors starting July 1. The rules place the burden of assessing investor competence on the financial institutions. It is a milestone for investor protection in China, where more than 80% of market participants are retail investors.

How did the mandatory assessment come to be?

Since 2007, China’s securities regulator has intermittently issued rules on assessing investor suitability for futures and private-equity markets. The latest measure is China’s first attempt to apply uniform rules across all asset classes and clearly state the responsibilities of financial institutions. Under the rules, a brokerage or fund company can only sell an investment product or recommend an investment strategy that is suitable for an investor. These assessments are based on information such as income, assets and liabilities, investment knowledge and experience.

How does it work?

Brokerages or fund companies must first cull the professional investors from the ordinary ones. Professional investors are institutional clients and high-income individuals who have at least 5 million yuan ($737,000) in financial assets or have earned an average annual income of at least 500,000 yuan over the previous three years. They must also have at least two years of investment experience. Qualified professional investors are not subjected to this rule.

Those who are not professional investors are classified as ordinary investors, according to the revised guidelines issued Wednesday by the Securities Association of China (SAC), an industry body that operates under the CSRC’s supervision.

Among these investors, the mandatory assessment will categorize them into one of five tiers, with tier 1 being the most vulnerable group. Brokerage and fund companies are required to categorize their own products and investment strategies into five tiers, with tier 1 being the least risky.

How does the assessment protect investors?

Brokerages or fund companies must adhere to the investor’s risk profile when selling them investments or services. For instance, they are not allowed to recommend tier-2 products to tier-1 investors.

If investors insist on buying a product with a risk profile higher than their own, the brokerages or fund companies are obligated to warn them of the risks and must give them greater attention, such as by inviting them to give feedback more often.

Are financial institutions prepared?

GF Securities, one of China’s largest brokerages, has designed new contracts and protocols, upgraded its computers systems and held employee and investor training, an employee at the firm told Caixin.

For brokerages, the previous draft of the guideline was stricter than the final version. For example, the draft had labeled stocks as tier-3 investment products, which some interpreted as essentially barring tier-1 and tier-2 investors from the stock market. The investment community complained that doing so would shrink the size of the stock market. The provision did not make the final version of the rules. “We won’t take a one-size-fits-all approach,” Zhao Min, director of the CSRC’s Investor Protection Bureau, said Monday on state television.

What will happen if brokerages or fund companies do not follow the rules?

The CSRC said it will step up checks on brokerages and fund companies, though the latest announcement did not mention how it will punish them for breaking the rules.

Contact reporter Liu Xiao (

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