Private law and public regulation for investor protection in the asset management industry: Aims and practices of transposing the UK model in China
| Author | Yonghui Bao,Joseph Lee |
| DOI | 10.1177/1023263X20958375 |
| Published date | 01 February 2021 |
| Date | 01 February 2021 |
| Subject Matter | Articles |
Article
Private law and public
regulation for investor
protection in the asset
management industry: Aims
and practices of transposing
the UK model in China
Joseph Lee* and Yonghui Bao*
Abstract
The paper discusses how asset managers are regulated in the UK in order to provide investor pro-
tection and market confidence. Fiduciary duties and the duty of care in the English common law,
statutorylaws, the rules of theFCA, and other industrycodes are examinedto provide an explanation
of the UK regulatoryapproach to the assetmanagement industry.The paper then discussesthe extent
to whicha legal transplant of theUK model to China may be feasibleas the asset managementindustry
is currentlybeing reformedin China.Recommendationsare made for Chinato develop an independent
asset management industry, to provide more investment outlets for investors, and to have effective
enforcementmechanisms of laws and rules to deliver market confidence and investor protection.
Keywords
Asset management, fiduciary duty, investor protection, shadow-banking, China
1. Introduction
The asset management industry has contributed significantly to the economy of the United King-
dom, for example through the management of large pension funds and other corporate activities
such as takeovers.
1
The UK asset management industry is currently ranked the second largest in the
* School of Law, University of Exeter, Exeter, UK
Corresponding author:
Joseph Lee, PhD (Lond), Senior lecturer in law, School of Law, University of Exeter, Stocker Rd, Exeter EX4 4PY, UK.
E-mail: j.lee@exeter.ac.uk
1. R. Meade et al., Asset Management in the UK 2017–2018: The Investment Association Annual Survey (The Investment
Association, 2018).
Maastricht Journal of European and
Comparative Law
2021, Vol. 28(1) 59–82
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world after that of the United States, and overseas clients represent 40%of their business.
2
The
success of this industry can be attributed to a number of factors: the tax regime, legal and financial
expertise, and the legal and regulatory framework.
3
These frameworks are part of the essential
infrastructure in the development of asset management, and they aim to provide both investor
confidence and legal certainty in order that the industry can manage its legal risk.
4
The asset management industry in China has developed rapidly since 2012. The total financial
value of assets under management increased from 27 trillion RMB in 2012 to 115 trillion RMB in
2016, and the average annual growth rate was 44%.
5
However, the large size of the asset man-
agement market and its high growth rate does not mean that China’s asset management industry is
solid and consistent. Before the introduction of the regulations on shadow banking in 2017, many
asset management institutions in China were tools (platform providers) through which commercial
banks evaded regulatory requirements to expand their scale of credit loans.
6
Many asset manage-
ment institutions were involved in risky shadow banking businesses. Asset managers promised
investors guaranteed returns, for example through rigid payment, which discouraged investors
from insisting on their right to know and influence investment decisions.
7
In other words, investors
were protected by rigid payment, yet such an arrangemen t increased the systemic risk of the
financial market and made financial institutions inherently fragile.
8
A strict regulatory regime on asset management industry was implemented in China from 2017
onwards, and rigid payment has been banned there in order to protect investors. Investor protection
has become increasingly important for the growth and stability of the industry. However, because
the financial markets in China are supervised sector by sector, there are regulatory overlaps and
gaps between the asset management vehicles governed by different Chinese authorities. There is
room for regulatory arbitrage. In addit ion, there is no single set of duties that ap ply to asset
managers, in the way that fiduciary duty is regulated in the UK. Instead, asset managers’ duties
are set out in different laws and legislation which are not always consistent. There is a need for
China’s asset management industry to unify its governing rules on asset management vehicles in
order to enhance asset managers’ accountability and investor protection.
In a global competitive market, the legal and regulatory framework is one consideration for
asset managers and clients when they decide where the legal seat and management seat for the
funds should be sited.
9
The legal and regulatory framewo rk comprises several legal so urces:
private law, public regulation and other industry standards (soft law). This paper investigates the
UK legal and regulatory model through an examination of how private law (fiduciary duties and
duty of care in English common law) interacts with public regulations (the Financial Services
and Markets Act 2000 and the rules of the UK Financial Services Authority) to protect investors
and provide legal certainty to the asset management industry. As China develops its asset
2. A. Bailey (Chief Executive at the FCA), ‘Asset Management: A Regulatory Perspective’, (2018), www.fca.org.uk/news/
speeches/asset-management-regulatory-perspective.
3. H. Van Steenis, Future of Finance: Review on the Outlook for the UK Financial System, Bank of England.
4. P. Dickson, The Asset Management Review (4th edition, Law Business Research Ltd, 2015), p. 476.
5. Z. Zheng et al., Annual Report on the Development of China’s Assets Management Industry (June 2018).
6. S. Wei, ‘Wealth Management Products in the Context of China’s Shadow Banking: Systemic Risks, Consumer Pro-
tection and Regulatory Instruments’, 23 Asia Pacific Law Review (2015), p. 102.
7. Ibid.
8. Ibid.
9. P. Dickson, The Asset Management Review (6th edition, Law Business Research, 2017), p. 476.
60 Maastricht Journal of European and Comparative Law 28(1)
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