China’s securities regulator, the China Securities Regulatory Commission (CSRC), has introduced draft rules to reduce trading commissions for mutual funds and address conflicts of interest within brokerages’ securities trading and fund sales businesses. This move is part of ongoing efforts to reform the $3.8 trillion mutual fund industry, boost investor confidence, and revitalize the country’s sluggish stock market.
The proposed rules, open for public consultation, seek to safeguard investors and enhance the regulation of how fund managers allocate trading commissions. The CSRC had previously urged mutual funds to lower management fees and minimize costs for investors five months ago.
According to the draft rules, trading commissions for both passive and active fund products would be cut, with overall commissions estimated to be reduced by about one-third, as per SWS Research. Additionally, the regulations prohibit fund managers from using trading commissions to purchase third-party services, such as external consultancy, financial terminals, or databases.
A common practice in the industry, paying additional commissions for services with questionable value, can inflate trading costs for fund investors. The proposed rules also mandate that the sales team of mutual funds should not participate in selecting a broker or allocating trading commissions.
Furthermore, the draft rules set a cap, specifying that a mutual fund company cannot allocate more than 15% of its total trading commissions to a single brokerage. The CSRC emphasizes that fund managers should choose financially sound, well-behaved brokerages with strong trading and research capabilities.
Analysts suggest these reforms would benefit brokerages with robust trading and research capabilities. Founder Securities commented that the rules would guide the brokerage business to its roots, emphasizing research. Kaiyuan Securities anticipates further CSRC regulation on fund distribution fees in the reform’s next phase.
These proposed changes represent a significant step in aligning the interests of mutual fund investors and addressing potential conflicts within the industry, signaling a commitment to fostering a more transparent and investor-friendly environment in China’s mutual fund sector.
