Rules for determining the ‘channel’ liability of entrusted parties

The Guiding Opinions on Regulating the Asset Management Business of Financial Institutions, officially implemented on 27 April 2018, expressly prohibit financial institutions from providing channel business for the asset-management (AM) products of other financial institutions to enable them to circumvent regulatory requirements in terms of scope of investment, gearing, etc.

“Channel business” means a trading arrangement wherein a commercial bank, as the client, uses wealth-management funds or its own funds to establish an AM plan, trust plan or other such investment product through an entrusted party, such as a securities, trust or insurance company, as a channel, and thereby provide financing for the client’s target customer or invest in other assets.

Channel business is so named because the client is responsible for raising funds at the funding end and investment designation at the asset end, while the entrusted party’s AM business merely serves as the “conduit” for the funds flowing towards the assets designated by the client. Although the channel business is coming to a close, the risks buried in it should be stressed. Once occurred, the liability of the entrusted party, owing to its unclear or ambiguous authorization and unfulfilled responsibilities, could be pursued by the client or a third party. In judicial practice, the rules for determining the civil liability of the entrusted party in channel business are as follows.

Yao Xiaomin is a partner and Ma Yupeng is an associate at Lantai Partners