On April 19, the China Securities Regulatory Commission (CSRC) issued the Regulations on the Administration of Securities Transaction Costs of Publicly Offered Securities Investment Funds (hereinafter referred to as the "Regulations"), which will be officially implemented from July 1, 2024. This marks the implementation of the second phase of the fee reform of the mutual fund industry, and the comprehensive rate level of the industry continues to decline steadily.
The Provisions further strengthen the operational transparency of the mutual fund industry. Compared with the previous Consultation Paper, the new regulations have been fine-tuned in terms of specific content, including explicitly prohibiting the use of trading commissions to pay liquidity service fees, making up for the loophole of fund products circumventing the upper limit of commission distribution ratio through bond transfer, and adding clear requirements for the compliance responsibilities of fund managers and their senior managers, consolidating the responsibilities of managers.
A number of institutions in the industry have stated that the "Provisions" aim to regulate the management of securities transaction commissions and distribution of fund managers, so as to protect the legitimate rights and interests of fund share holders. The issuance of the new regulations not only marks the further improvement of the "1+N" policy system composed of the new "National Nine Articles" and a series of supporting system rules, but is also expected to significantly reduce investors' fund investment costs, safeguard investors' rights and interests, promote a healthier and fairer investment environment, and promote the public offering industry to better return to the business origin of "being entrusted by others and managing wealth on behalf of others".
However, the implementation of the new regulations has also brought a number of challenges to all parties involved. Fund companies need to improve their internal research capabilities to ensure the high quality of investment decisions, while brokerage research institutes are faced with the need to reposition themselves and transform their business models. For investors, although the new regulations have reduced their financial burden by reducing the operating costs of mutual funds, the core income of investment still depends on the wise investment decisions of fund managers. Institutional sources remind investors that when making investment choices, they should not rely solely on the level of fees, but should take into account the investment strategy and historical performance of the fund manager.
Make up for the loopholes in the bond settlement rules and consolidate the responsibilities of managers
Overall, the "Provisions" have a total of 19 contents, which have a significant impact in four aspects, and the specific measures include: first, adhere to the priority of investors' interests and reduce the commission rate of fund stock transactions; second, reduce the upper limit of the commission distribution ratio of fund managers in securities transactions, and strengthen the supervision of commission distribution; third, comprehensively strengthen the relevant compliance and internal control requirements of fund managers and securities companies; and fourth, clarify the content and requirements of transaction commission information disclosure at the fund manager level, and strengthen market supervision and restraint.
Compared with the previous draft for comments, the Provisions have not changed much, and the main changes are reflected in the following aspects.
First, the provisions on payment methods have been adjusted, and the phrase "other expenses such as research services shall not be paid through transaction commissions" in the Consultation Paper has been changed to "other fees such as research services and liquidity services shall not be paid through transaction commissions". This change means that the market making service fees provided by brokerages for passive index funds are also clearly included, and mutual funds are not allowed to use trading commissions to pay.
The second is the upper limit on the commission distribution of a single brokerage, which is lowered from the original 30% to 15% in the consultation paper. The officially promulgated Provisions retain this and add the content that "fund managers shall not circumvent Article 5 by converting the securities trading mode of existing funds", plugging the loophole that fund products can circumvent the upper limit of the allocation ratio by converting securities settlement. However, this adjustment does not affect the stock settlement products, and the new regulations clearly state that for existing funds that adopt the brokerage trading model, if the transaction commission is used to pay for research services, such behavior is not subject to the new regulations, which is conducive to the development of the securities settlement business.
Third, it continues to emphasize that it is forbidden to link the distribution of trading commissions with the scale of fund sales, and adds a new provision: "If a fund manager entrusts a money brokerage company to provide brokerage services for the fund, the relevant service fees shall not be paid from the fund assets." "There are further strict restrictions on channel rebates.
Fourth, the responsibilities of managers have been further consolidated. The officially released Provisions require that the general manager, compliance officer and other senior management personnel of a fund manager shall conscientiously perform their compliance management duties. At the same time, the compliance officer shall also conduct a compliance review on the selection of securities companies, the distribution of trading commissions, and the conversion of trading models of existing funds involved in the company's securities transactions.
Total commissions fell by 38%, saving investors $20 billion a year
Since July 2023, the rate reform of the mutual fund industry has been steadily progressing in three stages according to the path of "manager-securities company-sales agency", aiming to gradually reduce the comprehensive rate of the public fund industry.
In the first phase of the reform, the management fee and custody fee rate of active equity products have been reduced in an orderly manner, which will be completed by the end of October 2023, which is expected to save investors about 14 billion yuan per year. The second phase involves reducing trading commission rates and strengthening the supervision of trading behavior, and the relevant reform measures have been fully implemented.
E Fund said that the company and more than 100 fund managers in the industry have gradually adjusted the management fee rate and custody fee rate of its existing active equity public fund products to below 1.2% and 0.2%, and launched the first batch of pilot products to implement floating management fee rate to provide investors with more choices. The "Regulations" issued this time complement the previously released "Revised Plan for the XBRL Template for Disclosure of Public Fund Rates", marking the implementation of the second phase of the rate reform of the public fund industry.
According to the Regulations, the reduction of the commission rate for initial stock transactions will be completed by July 1, 2024. China Asset Management believes that based on static data in 2023, investors will be saved 3.2 billion yuan and 6.4 billion yuan in costs in 2024 and 2025 respectively. The total annual stock trading commissions of public funds will be reduced by 38%, and the first two phases of rate reform measures can save investors about 20 billion yuan per year. This shows that the reform of the transaction commission system is conducive to reducing investment costs and safeguarding the rights and interests of investors.
In addition, the "Provisions" clarify the upper limit of the commission rate of public fund stock trading, and link the transaction commission rate with the average stock transaction commission rate in the market. GF Fund and Wells Fargo Fund both said that the comprehensive fee borne by investors in the future will be further reduced, and eventually form a virtuous circle of improving investors' sense of gain and attracting more medium and long-term funds into the market, which is a real good policy for the people.
China AMC expects that in the next step, the China Securities Regulatory Commission will focus on fund sales, further standardize the subscription rate and other sales fees, promote the pilot outsourcing of fund back-end operation services, and further reduce the operating costs of small and medium-sized fund companies.
Based on research services, the commission is distributed prudently
Since the launch of the rate reform in the mutual fund industry, "safeguarding the legitimate rights and interests of investors" has been the core orientation of the regulators.
The business origin of public funds is "entrusted by others and wealth management on behalf of others". In the view of China AMC, the Provisions emphasize that fund managers need to reasonably choose the securities trading mode and reduce transaction costs. In addition, fund managers are required to conduct transactions in strict accordance with the investment scope and strategies agreed in legal documents, and any violations that infringe on the interests of investors are strictly prohibited. These regulations aim to promote the mutual fund industry to further correct its business philosophy, return to the origin of asset management business, and pay more attention to investor services and returns.
An important change in the new regulations is the reduction of the upper limit of the commission distribution ratio of securities companies from 30% to 15%. Wells Fargo believes that this measure not only further strengthens the constraints within the manager and outside the custodian, but also requires the manager to carefully allocate commissions and select trading models based on high-quality research services. This will prompt securities companies to continuously strengthen their research service capabilities, improve the quality of sell-side investment and research services in the mutual fund industry, and guide them to diversify, specialize and develop with characteristics.
GF Fund also emphasized that the reform of the transaction commission system will promote the industry to focus on the core capacity building of investment and research, and enhance investment capabilities by enriching investment strategies, innovating management models and optimizing investment processes. In addition, the reform will also enable the mutual fund industry to further put the protection of investors' interests in the first place, and improve the investor experience through various means such as the development of investment advisory business, investor education and "counter-cyclical layout", so as to enhance the long-term returns of investors.
At the level of information disclosure of commission distribution, the "Provisions" also put forward clear requirements. Before March 31 of each year, the fund manager shall publicly disclose on the official website the criteria and procedures for selecting securities companies, the affiliation with the securities companies providing services, the commission rate for stock transactions, the annual summary and distribution details of trading volume, and the annual summary expenditure and distribution details of trading commissions.
In this regard, Wells Fargo Fund believes that through the new supporting information disclosure content and mechanism requirements of the "Regulations", the transparency of fund transaction commission rates and distribution has been improved. This not only enables investors to understand the costs and expenditures of public funds in securities transactions more conveniently and intuitively, but also further supervises and restricts the compliance of fund managers. These measures have jointly promoted the healthy development of the mutual fund industry and the enhancement of market trust.
Challenges remain, and the competitive landscape needs to be reshaped
Some industry insiders also told the brokerage China reporter that the landing of the new "commission reduction" boots also posed some challenges to many participants. The competitiveness of some organizations needs to be reshaped, and the business model needs to be innovated.
For fund companies, the implementation of the new rules means that they must re-evaluate and strengthen their internal research capabilities. "The adjustment of the commission rate has a greater impact on the income of the brokerage research institute, and it is inevitable that the seller's enthusiasm for providing services will decline. A leading public offering investment researcher in Shanghai revealed to a brokerage China reporter.
In the context of "commission reduction", the enthusiasm of brokerages to provide research services will be reduced, and fund companies may face the challenge of insufficient external research support. In the person's view, this change will force fund companies to increase their own research efforts to maintain the quality and accuracy of investment decisions. However, he believes that those fund companies that already have strong research teams and sufficient research reserves are generally able to adapt to this change and maintain their market competitiveness.
For the brokerage research institute, transformation is imminent. "The revenue structure and competitive landscape of the industry are changing, market share will be redistributed, and major research institutes will face a wave of capacity 'clearing'. A researcher from a leading brokerage firm in Shanghai told a reporter from Brokerage China.
In his view, the pressure of lower commission rates has reduced the number of brokerages that were able to break even, forcing some brokerages to reposition themselves and choose whether to continue to focus on traditional sell-side business or transform their business. In his view, the leading brokerage has the opportunity to continue to expand the scope of services and become a comprehensive research institution, while for non-leading brokerages, it should focus on becoming a boutique research institute and focus on specific areas, especially those industries with heavy positions in public funds and high profit potential.
Huatai Securities also said that in the future, the market environment will put forward higher requirements for the comprehensive strength of brokerage research, which is conducive to the differentiated development of brokerage research business, providing more high-quality trading, research and investment services, further improving the industry ecosystem, and promoting the transformation of wealth management.
For investors, the new regulations on commission reduction have brought direct benefits - reducing the operating costs of public funds and reducing the financial burden of investors. However, challenges for investors remain. While reducing transaction costs can safeguard investors' interests in the long run, some industry observers say investors should recognise that the core value of a fund still relies on smart investment decisions by fund managers. Therefore, when choosing fund products, investors should have an in-depth understanding of their investment strategies and historical performance, and make rational judgments to achieve performance returns that exceed the market average, rather than just making decisions based on the fee level of the products.
Editor-in-charge: Gui Yanmin
Proofreading: Su Huanwen