Regulator Has Eyes on Popular Online Investing, Sources Say; CSRC beginning to worry about the unregulated activity, which often sees sellers pledge eye-catching returns

12.27.2013 18:40

Regulator Has Eyes on Popular Online Investing, Sources Say

CSRC beginning to worry about the unregulated activity, which often sees sellers pledge eye-catching returns

By staff reporter Yang Lu

(Beijing) – The China Securities Regulatory Commission (CSRC) has been mulling measures governing the e-sales of investment funds, sources with knowledge of the matter say.Virtual stores touting high-yield funds have been extremely popular with retail investors this year because they promise returns much higher than bank deposits, with some exceeding 10 percent. The benchmark interest rate for a one-year deposit is of 3.25 percent.

Fund management companies, licensed independent fund sellers, news websites and Internet companies have joined the game, and some of their marketing tactics apparently worry the CSRC.

“The CSRC is having a real headache dealing with the various sorts of subsidy mechanisms that companies came up with,” an official with the regulator said. “The existing regulations for fund sales hardly address companies’ subsidizing operations with their own money.”

Bai Fa, an investment service developed by Baidu, the country’s version of Google, ran afoul of the regulator in October when it launched its first product. Its ad campaign said investors will get an annual yield of 8 percent.

Analysts interpreted the ad as Baidu promising a certain yield to investors, something that fund companies, securities firms and CSRC-licensed sales agents are strictly forbidden from doing under the CSRC’s regulation.

Baidu is not bound by the regulation. It did, however, reword the ads and postpone the launch of Bai Fa to December 18.

But investors can still expect to receive an annual yield of 8 percent. This is guaranteed by a scheme that sees Baidu use its own money to make up the difference if the product’s return fails to meet a target.

Others are using a similar tactic. The website NetEase, funds aggregator website Tian Tian Fund Sales and others have promised to give investors cash or more units of the funds should their investment returns be lower than expected. Some others reward investors through lotteries.

Current regulations only say that subsidies must not be directly linked to the sales of funds.

Many funds restrict investment amounts so a company paying the guarantee can estimate and control costs, analysts say. Also, their promises of high yields often expire after a short period.

Net firms are using the tactic to build a customer base quickly, an e-commerce expert said.

Many of the promised high yields are not sustainable because they are not returns from actual investments but subsidies that can be written off as marketing expenses, a fund manager said.

The Cooperation Problem

There are also concerns that the online sales of funds downplay risk by making it much simpler and more convenient to invest, thus encouraging people who otherwise may not be ready for such investment to risk their savings.

Although it is true that money market funds, which constitute the majority of funds sold online, are not high risk, this does not mean they are immune to loss, experts say. In fact, they are exposed to liquidity risks just as any other investment tools, they say.

Some lawyers have suggested that the business is a disguised form of taking deposits, something only banking institutions can legally do. One said all services that guarantee the full repayment of an investment amount to a deposit-taking operation. That makes the way many companies advertise funds online all the more dubious.

Regulation will require cooperation between the CSRC and the banking regulator, which oversees deposit issues, something that is not close to happening for now.

Nevertheless, a source close to the CSRC said action may be needed. “Protecting the safety of investor money is the most important priority of the regulators,” the source said.