Some thoughts on...wealth management connect

In June 2020, the People's Bank of China, the Hong Kong Monetary Authority and the Monetary Authority of Macao announced the launch of a new scheme in the Greater Bay Area ("GBA") called "Wealth Management Connect" ("WMC"). Over the past year, a few more additional announcements have been made and the Hong Kong government expect the scheme to be launched "any time soon"!

The GBA consists of 9 municipalities of Guangdong province (including Shenzhen and Guangzhou) (for this article the 9 cities shall be referred to as "Guangdong") together with the Special Administrative Regions of Hong Kong and Macao - a population of over 70 million and GDP of US$1.6tn (which would be 12th in the world). See https://www.bayarea.gov.hk/en/home/index.html.

What is the WMC?

In simple terms the WMC is a program to allow individual investors to invest "Northbound" (for residents of Hong Kong / Macao) and "Southbound" (for residents of Guangdong). This piece concentrates on the Guangdong- Hong Kong proposal.

Initially WMC is operated by banking institutions. This may change in the future. A bank in Guangdong must partner with a bank in Hong Kong and vice versa.

For Southbound connect, residents of Guangdong (there is the concept of household registration) will be permitted to invest into eligible investment products distributed by Hong Kong banks. The relevant Guangdong bank will be responsible for the cross border remittance and the Hong Kong bank for product distribution. The Guangdong resident will open an account with the Hong Kong bank. For Northbound connect, the reverse is the case. Initially only one account per individual is permitted.

In terms of specifics, the cross border remittances will be in RMB. The system is structured so that the funds remain only in the relevant accounts (and flow back to the same account from where they came ("closed loop")) and the relevant investment products. In Hong Kong, the accounts are intended to be "execution only" and only lower risk products are to be available.

The initial quota is RMB 150 billion and for each individual investor RMB 1 million (c. USD155k).

The main regulators from the parts of the GBA signed an MOU in June 2020. I have only looked at the translation(!) but some of the main points are thus:

• regulation will be carried out by the jurisdiction where the activity takes place. Complaints will also be dealt with in that region.
• the appropriate regulators will give guidance to their respective banks as to the nature and risks of the eligible products and to the appropriate investor protection.
• the appropriate regulators will give guidance to their respective banks as to how to comply with obligations relating to the AML/CFT.
• accounts are not intended to be used as pledges and guarantees.
• data is to be protected

So what are some of the initial thoughts which come to mind?

Wealthy Guangdong residents have been investing and continue to invest in Hong Kong and elsewhere for many years without limitation as to products. To an outsider, exchange control has often seemed irrelevant! There has also been a certain degree of "residence" arbitrage by PRC citizens with HK identity cards and properties. CRS has no doubt reduced this.

The current quota is a sizeable amount for the average citizen and is expected to increase. However in banking circles, this would be the "mass affluent" category - below High Net Worth. The banks can only offer execution only so for them it is about numbers of customers with commoditization and efficiency. The WMC is not aimed at HNW clients.

For Southbound customers, will the quota be in addition to the USD50,000 annual exemption?

Will there be any tax concessions for income earned in one territory by taxpayers in another?

How will HK banks be comfortable with KYC/CFT information from Guangdong bearing in mind the need for cost efficiencies?

The WMC will result in individuals from one territory owning assets in another. This is relatively common to those of us in the international wealth planning industry but may be the first time for users of the WMC. Because of the one country -two systems (three with Macao) nature of the region, there are immediate and potential conflicts of laws issues which may need to be addressed. Bearing in mind the costs of lawyers, notaries, translators, medical experts and court applications weighed against the limit of USD155k some thought should be given.

By way of example:

• Guangdong has community property for spouses - therefore assets may be "joint" notwithstanding they are in the name of one spouse. Are there any KYC issues? What if the other spouse is not a Guangdong resident?
• The legal systems have different ways of dealing with assets in respect of death, divorce and incapacity. How will the WMC holdings be dealt with? Those of us who deal with HK banks know it can be quite difficult in the event of death or incapacity of the account holder- even where there is no cross border element.
• What if the heirs, spouses, executors/administrators do not qualify for WMC (because of their residence) or already have an allocation? What if the heirs do not have capacity?
• There is a danger that the legal costs become disproportionate to the value of the asset. I have done Cayman Islands probate applications for small investment fund holdings which ate up half of the value.
• Many clients will wish trustees or companies to hold their investments. Will this be available in the future?
• Will the scope of products and financial institutions be extended?

Some food for thought.