The Chinese Securities Regulatory Commission is cracking down on non-compliant margin trading on behalf of clients as never before. It also has a hand in the forthcoming overhaul of China's securities regulations, especially as they affect HNW investors.

Reuters reports that six brokerages, including Minmetal Securities Co Ltd, Huatai Securities Co Ltd, Huaxi Securities, Great Wall Securities Co Ltd and China International Capital Corp have been reprimanded for breaking the margin trading rules. Their main offence was to sell products to unqualified and 'higher risk' clients. They were caught in a 46-firm-wide dragnet that the CSRC initiated in January. In that month, CITIC Securities Co Ltd, Guotai Junan Securities and Haitong Securities Co Ltd were forbidden to open new margin trading accounts on behalf of high-net-worth investors and others for three months. That particular moritorium is now nearing its end.

The growth of administrative reconciliation

Moreover, a new system of 'administrative reconciliation' for the settlement of regulatory cases is on the cards. The reason for it, according to the CSRC, is that "it is imperative to make up for the economic loss suffered by investors as a result of violations and protect the interests of individual [HNW] investors."

The New Model of Administrative Reconciliation in Regulation and Enforcement, as it is known, is a plan to combine the best elements of "administrative prosecution," whatever that may be, and civil remedies. These are two different legal procedures. Administrative enforcement, so the argument goes, fails to bestow the right compensation on investors; while in civil litigation, investors tend to encounter high burdens of proof and to pay hefty costs, which hampers the effectiveness of civil remedies. In the face of these practical difficulties in investor protection, many countries and regions in the world have adopted administrative reconciliation as an effective enforcement measure, meeting the need of both the administrative enforcement of regulatory agencies and the compensation for loss suffered by investors.

The CSRC's chairman, Xiao Gang, said recently: "In the face of these practical difficulties in investor protection, many countries and regions in the world have adopted administrative reconciliation as an effective enforcement measure. What makes this arrangement special is that the regulatory agencies may, in the enforcement process and in accordance with the law, reach a settlement with involved parties through negotiation, demanding...compensation to investors for the loss they have suffered. In some countries and regions, the cases settled through administrative reconciliation by regulatory agencies account for as high as 80% of all enforcement cases."

He went on to promise the steady launch of administrative reconciliation pilot programs in the securities and futures industry. The Administrative Coercion Law already sets forth stipulations for the implementation of administrative reconciliation, although not in a mature way. He said that the relevant amendment to the Securities Law and the enactment of a new Futures Law had already been included in China's latest legislative plan.

A wider investment area for insurance funds

While this is going on, China is also planning to let its domestic insurance funds invest outside the People's Republic, Macao and Hong Kong, according to its insurance regulator. At least 45 external markets have been earmarked as suitable locations for investment. At the moment, insurance funds must only buy BBB-rated bonds, whereas in the future they will be allowed to stoop to BBB-. Some take this to be a risky strategy, as credit rating agencies (a virtual American monopoly for some reason, although this is now changing) are famous for under-estimating risk in Western stocks and bonds and over-estimating risk everywhere else.

The regulator's vision for wealth management

Xiao Gang also said at the beginning of the year in Hong Kong that Asia had to do better in the wealth management market. He then laid out a few points.

1) The wealth management industry in Asia has yet to improve its overall competence and establish world-renowned wealth management brands.

2) Asian countries in general have a high rate of savings while lacking in investment intent and wealth management awareness. According to statistics, all countries with a savings rate of 50% and up (the percentage of total amount of savings in GDP) are in Asia.

3) The dominance of the US$ over the international monetary system only serves to exacerbate the problem of Asian capital being used to buy dollar-denominated assets. This may have been a side-swipe at the thousands of Chinese 'politically exposed persons' or PEPs escaping to the United States with their loot.

4) Financial markets in Asia are less than reasonably-structured and lacking in both depth and breadth, with a relatively low proportion of direct financing.

5) The historical traditions and laws of Asia lead to "a lack in the contractual spirit and credit culture" that is essential support for the development of the wealth management industry.

According to the report by Credit Suisse at the end of June 2014, the official added, global private wealth reached an aggregate size of US $263 trillion, and AuM of global wealth management institutions were enjoying a 11% year-by-year increase.