ICBC advances custody business by strengthening risk control and management
Li Yong, general manager of custody services at ICBC, discusses the development of its custody business in response to the fast-growing and changing asset management industry.
In 1998, the first batch of fund management companies such as China Southern Asset Management Co., Ltd., Guotai Asset Management Co., Ltd., Hua An Fund Management Co., Ltd., China Asset Management Co., Ltd, and Bosera Asset Management Co., Ltd. were established. This marked the beginning of China's asset management industry. In the next 20 years, the sub-sectors under asset management industry such as funds, insurance, trust, wealth management, and private equity entered a golden era of all-inclusive development which brought great development opportunities to the custody industry.
The scale of the industry increased nearly 17 times from RMB 9 trillion ($1.37 trillion) in 2009 to RMB 153.26 trillion ($23.39 trillion) at the end of 2019. Since the establishment of custody services in 1998, Industrial and Commercial Bank of China (ICBC) has maintained a leading position in the domestic custody industry. Faced with the ever-changing market environment, the global outbreak of COVID-19, and the impact of uncertain Sino-US relations on the capital market, how will ICBC respond and what can be expected in the future?
Establishing a strong custody business in line with rapid growth of asset management industry
Li summarised the core purpose of ICBC's custody servicesas “To protect investors’ rights by ensuring the compliance of asset managers to securities rules and regulations”. He shared that the main objective of the new regulations on asset management is to rectify the absence of regulation of asset managers in the initial development of the industry which resulted in the rampant growth of unregulated debt-based wealth management products. Stricter compliance would ensure the sound development of the asset management industry throughstronger and more transparent prudential regulations. “All asset management businesses must be placed under supervision. Without supervision, there will be chaos,” he added.
An effective custody function is the foundation of the sound development of the asset management industry, and custodians are close partners of asset management companies and the guardians of investors’ rights. With the rapid development of the asset management industry, ICBC has maintained a leading position in the industry in terms of the scale of assets under custody regardless of changes in the market environment. In the past five years under the leadership of Li, the scale of bank custody assets has increased from RMB5.82 trillion ($889.2 billion) at the end of 2014 to RMB17.6 trillion ($2.7 trillion) at the end of June 2020, with an average annual growth rate of 55%. It accounts for more than 12% of the market and it is the service with the highest market share among all ICBC services.
The strong results can be attributed to the attention that Li pays to risk management. From 2014, he foresaw the risks inherent in the booming peer-to-peer (P2P) depository products at the time. In 2015, the bank’s custody services cleared all P2P assets. This was accomplished more than a year before the Guidelines for Online Loan Fund Depository Business (Draft for Comment) was issued by the China Banking Regulatory Commission in August of 2016, which effectively stopped the third-party joint depository product and business model. For private securities, private equities, and industrial funds, ICBC also has strict entry standards. Li compares ICBC's custody services to a highway - there must be strict entry standards and requirements for vehicles on the road in order to ensure safety. According to the current structure of the bank’s custody assets, ‘strong custody’ assets account for more than 50% of total assets, which is much higher than the industry average of about 25%. This shows the robustness of its business. With the implementation of the new regulations on asset management, the era of ‘strong custody’ in asset management industry has arrived. Previously the local asset management industry, especially custody sector, lacked laws to supervise the market and regulate market behaviours. Stricter regulations have since been enforced and the whole industry is under more rigorous supervision, thus giving birth to the term ‘strong custody’.
Li believes that the asset management industry urgently needs a ‘fund law’ to ensure that custodians perform the duty of active supervision. He also expects that in the future, custodians can play a greater role in the sound development of the asset management industry.
Steadily promote cross-border custodian business by competing with leading international custodian banks
Li also has a broad international and long-term strategic vision. For a long time, ICBC has been positioning itself to be at a competitive level against international custodian banks such as State Street and BNY Mellon. With the continuous opening of China's capital market, Standard Chartered (China) and CitiBank (China) have successfully obtained fund custody qualifications. In the face of increased competition from international custodian giants in the future, Li said that foreign custodian banks still need time to localise themselves as they enter China. Considering the current volume of China’s asset management industry, local custodian banks continue to dominate and hold on to their competitive advantages. As foreign asset management institutions enter the domestic capital market in the future, competition will gradually increase.
At the same time, ICBC has already begun to actively expand its cross-border custody services. The bank actively builds a global custody service network through overseas branches such as ICBC Asia, ICBC US, ICBC Europe, and ICBC Singapore which provide cross-border custody services to more than 150 domestic and foreign investment institutions. In 2019, it obtained the first batch of Shanghai-London Stock Connect depository services qualifications. Li said that in the cross-border custody services of the four major state-owned banks, ICBC accounts for nearly 30% share of overseas fund investment in domestic asset custody, and the scale of its domestic fund investment in overseas asset custody accounts for a higher proportion, reaching 40%. ICBC won the award for Custodian Bank of the Year in Asia Pacific from The Asian Banker in four consecutive years from 2016 to 2019.
Increase technology investment to build the next generation of smart custodial banking system
ICBC has always considered an efficient and stable custody system as its core competitiveness in the custody business. ICBC is the first bank in China that independently developed a custody system, and has upgraded its system continuously according to customer and market needs. In September 2017, the bank’s sixth-generation custody system was launched and became the first domestic custody system with a distributed architecture, further expanding the flexibility of the system and shortening the response time to new demands.
It has launched its latest next-generation smart custodial banking system. The smart custodial banking system includes four functional componentss: smart operation, smart customer service, smart risk control, and smart management. Smart operation will be the foundation of smart custodial bank which will improve the automation rate, reduce manual intervention, and ensure the efficient and accurate execution of ICBC's 700 billion daily transactions. The bank’s automation rate of custody services has reached 90%.
Smart customer service relies on big data technology to help customers independently and quickly solve problems and improve customer experience. Smart risk control is designed to effectively control the potential risks of both branch and customer business which were more difficult to manage in the past. Finally, smart management helps the head office manage domestic branches, affiliated organisations and overseas operations more effectively. Li added that with the increase in use of intelligent technology, ICBC will reap higher return from its IT investments.