China Onshore Strategy – Foreign Financial Institution

May 2020 Introduction

Key speakers:

Karen Ko Jay Sala Li Cui Partner Partner Chief Economist and APAC Financial Services APAC Financial Services Head of Macro Research at China Strategy & Operations Performance Improvement Construction International Hong Kong Hong Kong [email protected] [email protected] [email protected]

Also with you today …

David Scott Loretta So Henry Zhu Michael Chen Andy Xie Partner Partner Senior Manager Senior Manager Senior Manager Financial Services International Tax and Risk Management – Financial Services Financial Services Risk Management Transaction Services Financial Regulation Strategy & Operations Strategy & Operations [email protected] [email protected] [email protected] [email protected] [email protected]

Page 2 Agenda

Introduction Financial liberalization The business case Navigating the path Market entries Target Operating Model (TOM) for China

Page 3 Background: Financial Liberalization provides opportunities to oversea players

2020 is another fruitful year that sees new opening-up policies in China - fund management allows 100% foreign ownership from 01 April and China’s securities regulator have removed foreign ownership cap on domestic securities firm. Next year, WFOEs are expected to be allowed to apply for fund licenses and enjoy full stake in domestic targets to expand their China onshore capabilities. China further opens up financial sector series To date, EY has released a series of 8 POV reports covering the following agenda and beyond:

► The impact of the 11-point liberalization plan on the wealth and asset management industry ; exposure draft of the CSRC’s new regulations and a comparative analysis of the QFII and RQFII regime

► Opportunities to incumbent foreign financial institutions and challenges such as China’s unique operating environment – more details to be discussed later. Key regulatory milestones include:

• Banking sector: CBIRC approved 18 applications for the establishment of the foreign-funded in the first 10 months of 2019 • Wealth and Asset Management sector: the timeline to remove foreign ownership cap has been moved For more details please forward from 2021 to 01 April 2020 ; > 20 foreign-funded institutions have obtained qualifications as access click here private securities investment fund managers • Securities sector: In Dec 2018, UBS Securities Co., Ltd (UBSS) became the first foreign-owned securities company in China

Our latest series of thought leadership on “China onshore for Foreign Financial Institutions” : Blog series #0: How do Foreign Private Banks going onshore in China aim for maximum success? Blog series #1: Why should Foreign Financial Institutions accelerate their China onshore strategy? Blog series #2: What is the latest trend for Foreign Financial Institutions entering China onshore?

Page 4 The Business Case Positive outlook of China Wealth Market

Ranked 2nd globally for UHNW1 wealth in 2018; 14.1% rise in UHNW population was outstripped by a 32.8% rise in total net worth in same year Wealth in China is increasing … … and is driven by socio-demographic trends China individual investable financial asset size (RMB Tn) Top Financial Planning, Specialized Services used by Chinese HNW Investors: 2019

Next generation services (for inter- 34.9% generational transfer) 63.6%

Personal financial budgeting and 38.0% planning 61.3%

Planning and financial services for 39.5% businesses 60.5%

Family office set-up and governance 42.6% advice 57.0% Current Considering/Planning in three years

► Individual wealth in China CAGR expected at 11% from 2019- ► By 2050, an estimated 330 million Chinese will be over 65 years of 2023 age

► Local players outpaced foreign private banks and asset managers ► The ageing population including the HNWIs demand specialized at +21.2% Vs +5.6% 2014-2018 CAGR services

► Inbound portfolio investment in China saw a CAGR +163% 2015 - ► Chinese’s saving rate is 3rd highest in the world – however local retail 2019 investors are shifting from saving to investing in recent years

Note: 1) UHNMI is defined as an individual with investable assets over US$30m 2) Net investable assets (NIA) defined as financial assets, collectibles and precious metals held by HNWI+, less financial liabilities, main Page 6 residence, durables and consumables 3) HNWI is defined as an individual with investable assets between US$1m to US$4.9m. Sources: EY Analysis, market database The rise of client switching providers

Average number of different wealth providers Increase or decrease in average % of respondents in APAC, i.e., net change of 7 6.66.7 expected usage Expected usage 6.1 6.2 5.9 6.0 (% of respondents) 5.7 5.6 5.5 5.5 The complexity 4.9 5.0 of client 22% 67% relationships 4.5 rises with 39% 62% investable 59% assets. 30% 22% 59% 19% 33% 2 17% 21% 0% 72% 20% Current number Future expected -15% 1% 65% 1/3 of clients plan to switch wealth management 34% providers over the next three years -1% 44% -13% Averaging >5 different types of wealth management 64% providers -6%

Pricing (24% would switch for) ; Advisory capabilities (22%); Personal attention (22%); Technology (19%); Firms need to act now to retain and attract clients Quality and reputation (18%); Products (17%)

Note: 1) It is not possible to show a country-level view of the life events due to small individual sample sizes 2) “FinTech” refers to new technologically-enabled services that enable investors to handle investment activities Page 7 without the need for human interaction Source: EY’s 2019 Global Wealth Management Research: Asia-Pacific key findings Navigating the path to going onshore in China

A high level overview of key considerations from launch to business day 1 Timeline Define overall vision and Clarify guiding principals for the China ambition for Chinese onshore strategy: Overall vision market: - Ownership and control and strategy - Onshore and Offshore - China AUM contribution to the Group Overall market entry strategy: - Entry options - High level cooperation discussions - Analyze market size and Define corresponding Client & client profiling: product propositions: Product - Client requirements - Existing product mix and capabilities Strategies - Target client segment(s) - Ideal product offerings and gap analysis Pricing design and Design distribution channels, sales and competitiveness studies marketing strategy Define the future operating model according to the entry strategy: TOM design Agreed on target operating model Execute market entries plan - Location and - Organization & people JV Integration/ Acquisition/ Greenfield set operational - Products & services up planning TOM implementation set up - Finance and risk - Taxation considerations

Define cyber security Define high level technology, data architecture, future and other IT regulatory Shortlist vendor/ partner Solution buildout, testing system blueprint that align with overall business strategy Technology requirement framework selection/ internal IT Define solution design and implementation and checklist Explore build, buy, partner strategies support Prepare for regulatory reporting required from Understand China regulatory landscape Prepare JV/ acquisition/license application Day 1 of business Regulatory Assess business feasibility and approval Monitor regulatory developments and ongoing likelihood of required licenses regulatory communications Acquisition or greenfield Establishing onshore presence Funding of pre-incorporation Tax configuration of IT system investment (WFOE / JV) - Location study and financial subsidy expense Fund launch – CRS and tax disclosure Tax - Potential restructuring and holding company R&D super deduction - Funding of the capital

PMO and Set up governance framework Set up PMO toolkit, communication strategy, change Implementation roadmap Ongoing change management - Progress, issues and risk tracking change management and reporting mechanism management

Page 8 Market Entries License Application An overview of China’s latest license application

Entity type Securities Futures PFM WFOE Fund Management Foreign Bank Branch

Foreign ownership 100% since 1 April 2020 100% 100% 100% since 1 April 2020 100% limit • Securities brokerage • Future brokerage • Buying and selling of • Buying and selling of • Deposits • Securities investment • Future investment stocks stocks • Loans consulting advisory • Equities, Bonds, Futures, • Equities • Financial advisor • Asset management Options • Bonds agreed upon in the Business • Underwriting and sponsoring • Fund units investment contracts scope issues of securities • Other investment objects • Securities margin trading agreed upon in the • Market making of securities investment contracts • Proprietary trading 20 working days after Regulatory 6 months after receiving all 6 months after receiving all 6 months for preliminary 6 months after receiving all receiving all required approval time required documents required documents review required documents documents Capital CNY 50 million to 500 million CNY 100 million No minimal requirement CNY 100 million CNY 200 million requirement based on planned business scope Public fund distribution; Asset management Bond Underwriting (CIBM); subsidiary; Investment Optional Public fund distribution (min. Bond Settlement Agent - - Advisory; QDII license; Corp licenses 3 year track record) (CIBM); Bond Trading Annuity management; Social (CIBM); Government Bond security management. and Market Making

Page 10 M&A market – recent transactions and partnership deals

Recent transactions and partnership deals involving foreign institutions taking control:

Announce Target Company Bidder Foreign • Foreign institutions are actively buying their additional ment Date ownership JV ownership in securities and asset management space % • It is expected that foreign players listed opposite are Securities: seeking to take 100% control Mar-2020 Huaxin Morgan Stanley 51% Securities • The foreign player that could not obtain controlling stake has exited by selling their JV ownership, such as Citi bank Mar-2020 Gao Hua Goldman Sachs 51% Securities Co Ltd Group, Inc • It is currently reported that 18 foreign financial Nov-2019 Nomura Orient International Nomura Holdings 51% institutions have applied for the majority control of their Securities existing China onshore joint venture Dec-2018 UBS Securities China UBS AG 51% • There has been limited M&A activity within the futures Dec-2018 Citi Orient Securities Co., Ltd Orient Securities Co 0% space in recent years; most deals were within group Asset Management: companies

Apr-2020 Vanguard Ant Financial Vanguard 49% • Amundi became the first majority foreign owner of a Services JB asset management joint venture in China, partnered with Aug-2019 China International Fund J.P. Morgan 51% Bank of China Wealth Management Management • Other asset managers are also considering applying for Dec-2019 Amundi Bank of China JV Amundi Asset 55% Management the fund management license to set up their wholly- owned mutual fund in China, such as BlackRock and Source: News search and market database Neuberger Berman Page 11 Target Operating Model (TOM) for China TOM considerations for China

6 components in EY’s operating model framework to deliver a successful and resilient operation model that enables effective onshore execution Process

Regulatory Location

Operating Model Consideration

Technology Governance & Organization

People

Page 13 Adapting China’s unique operating environment to TOM design

China has a unique operating environment … … which must be incorporated in TOM design

► Management and communication styles Key Design Principles: ► Foreign language ability Cultural ► Nature of engagement between industry and • Target the leanest local set-up necessary to achieve (a) Differences regulatory / political authorities 1 regulatory compliance, speed to efficiency and (b) China strategic objectives ► Recognition of qualified investors, product classification, NAV management and advisory services 2• Provide local client service but leverage global Regulatory ► Front office licensing scheme practices, investment expertise and scale as a means of differentiation Pre-establishment ► Restructuring; holding company; capital funding; • Align to group as much as possible, while adapting to funding of pre-incorporation expense 3 local market practice ► System configuration; CRS; tax disclosure of fund products Tax Post-establishment 4• Reconfigure digital delivery model and explore the new ► Ongoing tax compliance digital playing field of China including risk-based tools ► Tax planning – R&D super deduction etc and asset allocation guides

► Unique local technology vendors vs global vendors 5• Future-proof workforce by recruiting / up-skilling staff ► Cybersecurity, privacy and local data storage laws to be tech and data savvy with empathy-based skillsets Technology ► Fintech penetration rate Infrastructure

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