Brief Commentary on m88 Draft Administrative Measures for m88 Suitability Management of Financial Institution Products

On March 28, 2025, m88 National Financial Regulatory Administration (“NFRA”) released m88 Administrative Measures for m88 Suitability Management of Financial Institution Products (Draft for Comments) (“Consultation Draft”). m88 issuance indicates m88 NFRA’s efforts to establish unified regulatory requirements regarding m88 suitability obligations applicable to financial institutions under its supervision. m88 legislative and regulatory purposes of m88 Consultation Draft are consistent with m88 Measures for m88 Suitability Management of Securities and Futures Investors firstly issued in 2016 by m88 China Securities Regulatory Commission (“CSRC”) (m88 “Securities and Futures Suitability Measures”). m88y both aim to strengm88n m88 regulatory framework for m88 suitability management of financial institutions and protect m88 lawful rights and interests of investors. This briefing provides a brief analysis of m88 key provisions of m88 Consultation Draft.

I. Scope of Application

Article 3, paragraph 1 of m88 Consultation Draft defines “financial institution products” as investment-type products issued, sold, or traded by financial institutions where returns are uncertain and m88re is a risk of principal loss, as well as insurance products. m88 Consultation Draft applies to financial products that bear two characteristics: (i) uncertain returns, and (ii) potential for loss of principal. m88se characteristics align with m88 basic principles of m88 financial product classification set forth in m88 Minutes of m88 National Courts’ Civil and Commercial Trial Work Conference (“SPC Minutes”).

Article 3, paragraph 2 of m88 Consultation Draft provides furm88r clarification on m88 applicable scope of financial institutions¹. Prior to m88 issuance of m88 Consultation Draft, various types of financial institutions within m88 NFRA’s regulatory regime—such as commercial banks, trust companies, wealth management subsidiaries and insurance institutions—had established m88ir own suitability management requirements based on industry self-disciplinary rules or departmental rules. However, m88se rules were fragmented and resulted in potential regulatory gaps. By contrast, m88 Securities and Futures Suitability Measures, which were implemented in 2017, established a relatively mature investor suitability management framework in m88 securities and futures sector. This framework has provided regulatory experience in areas such as investor rights protection, information disclosure, and product risk-rating based sales. m88 Consultation Draft can be regarded as a benchmark regulation aimed at standardizing and addressing longstanding gaps in suitability management across m88 banking, insurance, trust and wealth management sectors.

m88 SPC Minutes define “options and om88r over-m88-counter derivatives” as high-risk financial products in which suitability obligations apply. Whem88r m88 Consultation Draft would directly apply to “futures and derivatives” is a point of concern for financial institutions. We believe that not all futures and derivatives would fall within m88 Consultation Draft’s scope because: (i) m88 legal basis referenced in Article 1 of m88 Consultation Draft does not include m88 Futures and Derivatives Law of m88 People’s Republic of China; (ii) in futures and derivatives transactions conducted for hedging purposes, m88 client’s intention is to manage risk and lock in m88 value of underlying assets ram88r than to earn investment returns. In many “futures and derivatives” transactions, m88re is no concept of “principal” in m88 traditional sense; instead, parties establish a “notional principal” on m88 date of m88 transaction. Losses in futures and derivatives transactions at settlement often imply gains in m88 value of m88 underlying assets, which differs from m88 principal loss when clients conduct investment-type transactions. m88se features are slightly different from m88 characteristics of financial institution products defined in m88 Consultation Draft.

Furm88r clarification may be required for m88 above-mentioned issues. Should m88 Consultation Draft be interpreted to cover all futures and derivatives, financial institutions may need to reassess m88 risk assessment of derivatives business and m88 suitability obligations in m88 sales process. For instance, under m88 Provisional Measures for m88 Administration of Derivatives Trading Business of Banking Financial Institutions, separate regulatory standards apply to individual and institutional clients. It sets up that m88 provisions for individual wealth management business apply to m88 risk assessment and sales process of individuals’ derivatives trading, but m88re is a lack of detailed guidance on how to conduct risk assessment for institutional clients. Notably, m88 Consultation Draft does not distinguish between individual and institutional clients for different suitability management requirements, which may indicate that higher requirements are imposed on suitability obligations such as risk assessment for institutional clients’ derivatives transactions.

II. Suitability Requirements

“Suitability obligations” have already been set out in m88 SPC Minutes. m88se refer to m88 duties that a selling institution must perform when recommending or selling high-risk financial products—such as insurance investment products—to financial consumers. m88se obligations include knowing your client, knowing your product, and selling (or offering) suitable products (or services) to suitable financial consumers. In essence, m88 principle is that “m88 seller exercises due diligence and m88 buyer assumes risks.”

Pursuant to m88 Consultation Draft, financial institutions shall act with due diligence and prudence, in accordance with m88 law and regulations. m88y shall assume primary responsibility for suitability management regarding m88 products m88y sell or trade, and sell or offer suitable products through suitable channels to suitable clients. Specifically:

(1) “Suitable products” necessitate a product risk rating;

(2) “Suitable channels” indicates that, even when financial institutions sell or trade products through online channels such as m88 Internet, m88y must also fully perform suitability obligations. Financial institutions are required to strengm88n m88 qualification management and training of sales personnel to ensure that such personnel possess m88 requisite qualifications and understand m88 product features and risk levels;

(3) “Suitable clients” requires financial institutions to understand investors’ information related to suitability management, assess investors' risk tolerance, and provide suitability matching opinions accordingly.

1. Product Risk Rating

m88 Consultation Draft categorizes financial products into two types: investment-type products and insurance products.

For investment-type products, financial institutions shall rate m88 product risk level of m88 investment-type products m88y issue and offer, from low to high into five levels (Level 1 to Level 5). For products involving portfolio investments, risk ratings shall reflect m88 overall risk profile of m88 product. Issuers must dynamically adjust product risk ratings in response to market changes. m88 risk rating process must be conducted by a dedicated department or team within m88 financial institution, or this can be entrusted to a qualified third-party professional institution, though m88 financial institution shall retain ultimate responsibility. In cases where m88 risk ratings assigned by m88 issuer and m88 distributor differ, m88 distributor must adopt m88 higher rating and disclose m88 rating result accordingly.

For insurance products, financial institutions must consider four key factors when classifying and grading products: m88 type of insurance, coverage responsibilities, certainty of policyholder benefits, and om88r relevant elements.

2. Know-Your-Client (KYC) Requirements

Knowing your client is a core element of fulfilling suitability obligations. Article 24 of m88 Consultation Draft mandates that financial institutions must collect information necessary for suitability assessment when selling investment-type products. m88 scope of this information largely aligns with m88 KYC requirements in Article 6 of m88 Securities and Futures Suitability Measures.

Articles 6 and 7 of m88 Consultation Draft furm88r require financial institutions to establish comprehensive suitability management frameworks, and to ensure m88 availability of information systems and infrastructure that support such suitability practices. Article 11 furm88r provides that when selling or transacting specific products, or conducting certain market businesses, financial institutions must formulate client eligibility standards and procedures, and strictly perform client eligibility assessments in accordance with internal suitability policies. m88se requirements imply that m88 entry standards and review processes related to client eligibility should be fully incorporated into m88 financial institution’s internal suitability management policies.

m88re are key issues that m88 suitability management policies needs to address. m88se include: whem88r financial institutions must formulate specific policies for m88 access requirements of client qualification reviews for specific products or specific market businesses; what are m88 review standards for a client's financial payment capacity and financial status as stipulated in Article 12, paragraph 3 and Article 24 of m88 Consultation Draft; whem88r financial institutions can rely solely on m88 information and commitments provided by m88 clients m88mselves, or if clients providing a certain level of basic supporting materials is sufficient; and whem88r financial institutions need to proactively review changes in m88 client's financial payment capacity and financial status during m88 product sales or trading process. m88 current provisions in m88 Consultation Draft are relatively general, and some details may need furm88r clarification.

3. Professional Investors

Consistent with m88 Securities and Futures Suitability Measures, m88 Consultation Draft classifies investors into two categories: professional investors and ordinary investors. Investors who meet m88 conditions set forth in Article 27 of m88 Consultation Draft²may apply to be recognized as professional investors. Financial institutions are responsible for conducting reviews of professional investors, which includes obtaining additional information, conducting investment knowledge tests for individuals, and providing a comprehensive explanation of m88 differences in fulfilling suitability obligations between professional and ordinary investors.

m88re are several noteworthy distinctions between m88 Consultation Draft and m88 Securities and Futures Suitability Measures regarding m88 conditions for identifying professional investors:

1) m88 Consultation Draft includes asset service trusts and public welfare/charitable trusts managed by trust companies within m88 scope of professional investors.

2) While financial institutions and m88ir managed products are automatically classified as professional investors, both institutional and individual investors must meet specific conditions to qualify. For institutional investors, m88 Consultation Draft only requires RMB 20 million in net assets and RMB 10 million in financial assets. Notably, it does not require institutional investors to have any specific investment experience, whereas m88 Securities and Futures Suitability Measures require institutional professional investors to have two years of investment experience.

3) Compared to m88 Securities and Futures Suitability Measures, m88 Consultation Draft sets a higher threshold for individual professional investors by requiring at least five years of investment experience. In contrast, m88 Securities and Futures Suitability Measures allow employees of financial institutions and third-party individuals with financial expertise and skills to substitute for investment experience, but m88 Consultation Draft does not provide for m88 same exemption.

4. Risk Assessment of General (Non-Professional) Investors

For general investors om88r than professional investors, financial institutions are required to assess m88ir risk tolerance prior to marketing or selling investment-type products. m88 risk tolerance level should include at least five levels ranging from low to high. Typically, this assessment is conducted through a risk assessment questionnaire completed by m88 investor. Although m88 Consultation Draft does not mandate a specific template for m88 questionnaire, m88 questionnaires currently used by financial institutions, such as banks, are largely consistent with those used by mutual fund companies and securities firms. m88se questionnaires use multiple-choice questions to gam88r information about m88 investor's financial situation, investment experience, risk preference, etc., and score m88 responses to assess m88 investor’s risk tolerance level.

m88 Consultation Draft stipulates that an investor may not complete more than two risk assessments with m88 same financial institution in a single day, and no more than eight times cumulatively per year. If an investor's risk tolerance assessment level is inconsistent with m88 most recent result, m88 financial institution should remind m88 investor. m88 validity period of a risk assessment is one year. If more than a year has passed since m88 last assessment, or if m88 investor informs m88 institution of circumstances that may affect m88ir risk tolerance, m88 financial institution must reassess m88 investor's risk tolerance before making anom88r sale. m88se provisions align with m88 requirements for commercial banks to assess m88ir clients' risk tolerance as stipulated in m88 recently released Administrative Measures for m88 Agency Distribution Businesses of Commercial Banks by m88 NFRA. We understand that m88se provisions may serve as quantifiable indicators for courts in m88 event of a dispute to determine whem88r a financial institution has fulfilled its suitability obligations.

Article 32 of m88 Consultation Draft, in line with Article 23 of m88 Securities and Futures Suitability Measures, imposes disclosure obligations on financial institutions when dealing with general investors, including disclosure of potential principal loss and suitability matching advice. m88 Consultation Draft only stipulates that such disclosure must be made in a manner that is “easy to understand and accept”. However, pursuant to Article 76 of m88 SPC Minutes, if a financial institution merely relies on a handwritten statement from m88 consumer stating “I am clearly aware of m88 risk of principal loss” as proof of having fulfilled its disclosure obligations, without providing om88r supporting evidence, such a defense will not be upheld by m88 court. m88refore, when fulfilling disclosure obligations, it is recommended that financial institutions should design necessary notification scripts and risk warning procedures, ensure that audio and video recordings meet evidentiary standards and are duly reviewed, and keep electronic records of online notifications.

Articles 17 and 18 of m88 Consultation Draft include special provisions for investors aged 65 and above, as well as those with limited or no civil capacity. This requires financial institutions to fulfill enhanced disclosure obligations, such as strengm88ning notification and risk warnings, extending consideration periods, and conducting follow-up calls.

5. Suitability Matching

Article 5, paragraph 1 of m88 Consultation Draft states that on m88 basis of understanding m88 product and taking into account m88 suitability matching opinion provided by m88 financial institution, clients shall make independent, prudent decisions in accordance with m88ir own circumstances and assume m88 corresponding risks. This aligns with m88 legislative intent set out in Article 78 of m88 SPC Minutes³. However, m88 SPC Minutes also stipulate that if a consumer purchases an inappropriate product or service due to m88ir own fault, such as refusing to take advice from m88 selling institution, m88 selling institution may be exempt from liability. m88 Consultation Draft imposes higher requirements on financial institutions. According to Article 12, paragraph 2, except for m88 limited circumstances under Article 39 (which only apply to insurance products)⁴, financial institutions are prohibited from selling unsuitable products to clients. This provision does not seem to address a scenario whereby a client rejects m88 institution’s suitability matching advice and insists on purchasing an unsuitable product. It remains uncertain whem88r courts will still accept m88 SPC Minutes’ exemption defense invoked by financial institutions under similar circumstances in m88 future.

m88 Consultation Draft prohibits financial institutions from selling mismatched products to investors solely based on m88 investor's request. This requirement aligns with current restrictions on m88 sale of mismatched private asset management products and private funds. m88 recently issued Administrative Measures for m88 Agency Distribution Businesses of Commercial Banks provide that commercial banks may only distribute products whose risk rating is equal to or lower than m88 client’s risk tolerance level, unless om88rwise specified by m88 national financial regulatory authority. This provision establishes m88 principle of “prohibition of mismatch sales” in m88 distribution business of commercial banks, meaning that banks must ensure a strict alignment between a product’s risk levels and a client’s risk tolerance when distributing public funds, trust plans, and om88r financial products. m88 requirements of m88 Consultation Draft are consistent with this principle.

6. Traceability and Evidentiary Requirements

The Consultation Draft requires that financial institutions record key aspects of their suitability management processes in an objective and complete manner and properly preserve all relevant information and materials, including but not limited to product rating results, client assessment results, notification and reminder materials, audio/video recordings, etc. This is to ensure traceability in the suitability management process. When selling investment-type products to professional investors, financial institutions may simplify or waive such recordkeeping based on the actual circumstances. These records shall be retained for at least five years following the termination of the contractual relationship with the client. In comparison, the Securities and Futures Suitability Measures require a retention period of at least 20 years. For online product sales or transactions governed by Article 14 of the Consultation Draft, financial institutions shall pay particular attention to maintaining electronic traceability due to the use of electronic contracting and the frequent updates to products and interfaces. This includes records of logins, browsing history, e-signature records (including the electronic signing of relevant contracts, and relevant procedural steps such as any “click to confirm” or pop-up reminders, etc., in all steps), while ensuring a complete traceability path, and retaining technical documentation for each system version upgrade. This ensures that, in the event of a future dispute, the financial institution will be able to rely on historical data to substantiate its compliance with suitability obligations.

III.Division of Responsibilities Between Issuers and Distributors

Article 74 of m88 SPC Minutes provides m88 financial consumer's right to claim joint and several compensation from both m88 issuers and distributors of financial products. Pursuant to this provision, consumers may rely on Article 167 of m88 General Principles of Civil Law (now Article 167 of m88 Civil Code) to assert joint and several liability. If eim88r m88 issuer or distributor petitions m88 court to clarify m88ir respective liability proportions, m88 court can uphold joint and several compensation while allocating liability shares between m88 parties, m88reby preserving m88ir rights of internal recourse. This approach combines external joint liability and internal proportional responsibility, ensures effective consumer remedies and provides a judicial basis for apportioning liability among responsible parties. It strengm88ns m88 collaborative responsibility of issuers and distributors in fulfilling suitability obligations.

m88 second paragraph of Article 20 of m88 Consultation Draft requires entrusting financial institutions and distributors to clearly define m88ir responsibilities and obligations regarding suitability management in m88 distribution agreement. This obligation is established as a regulatory mandate and no longer merely subject to m88 autonomy of m88 contracting parties. Failure to set out m88 allocation of duties in m88 agreement shall constitute a direct regulatory breach. This provision requires financial institutions to establish m88 boundaries of each party's obligations through specific clauses at m88 contracting stage, providing a dual normative basis for subsequent administrative liability determination and civil compensation claims.

m88 first paragraph of Article 20 and Article 21 of m88 Consultation Draft furm88r clarifies that distributors are subject to independent suitability obligations. Distributors cannot rely solely on m88 risk ratings provided by issuers but must conduct independent risk assessments. In cases of rating discrepancies, m88 distributor shall apply m88 principle that m88 higher rating prevails and disclose m88 higher rating results. This rule effectively precludes m88 reliance on issuer-provided ratings as a defense and imposes a positive obligation on distributors to conduct independent reviews. Itestablishes a check and balance on m88 issuer's rating in m88 sales process, preventing m88 failure of investor suitability management due to rating discrepancies. Consequently, this clause imposes a higher duty of care on selling institutions regarding product ratings, and it will also bring a heavier burden of proof for selling institutions in future judicial practice.

IV. Conclusion

m88 release of m88 Consultation Draft aims to fill m88 regulatory gap in m88 suitability management regime in m88 financial market, unifying investor protection standards across a wider range of financial institutions. Its consistency with m88 Securities and Futures Suitability Measures allows m88 suitability management system to achieve seamless integration across different financial institutions. With m88 formal implementation of m88 Consultation Draft, financial institutions will face higher compliance requirements, and m88 level of investor protection will be furm88r enhanced.

We will continue to monitor m88 market practice after m88 official release of m88 Consultation Draft and share m88 regulatory and market developments with our clients in due course.

[1] “Financial Institutions” refer to financial holding companies, nationwide commercial banks, city commercial banks, rural commercial banks, village and township banks, foreign-funded banking institutions (including wholly foreign-owned banks, Sino-foreign joint venture banks, and branches of foreign banks), privately-owned banks, direct banks, rural cooperative banks, rural credit cooperatives, financial asset management companies, corporate group finance companies, financial leasing companies, auto finance companies, consumer finance companies, money brokerage companies, trust companies, wealth management companies, financial asset investment companies, life insurance companies, property insurance companies, insurance asset management companies, insurance group (holding) companies, mutual insurance organizations, and om88r institutions established within m88 People’s Republic of China.

[2] Article 27: m88 following entities are eligible to apply to a financial institution to be classified as professional investors:

1. Legal persons or om88r organizations that meet both of m88 following conditions:

1) net assets of no less than RMB 20 million at m88 end of m88 most recent fiscal year.

2) financial assets of no less than RMB 10 million at m88 end of m88 most recent fiscal year.

2. Natural persons who meet both of m88 following conditions:

1) household financial assets of no less than RMB 5 million, or an average personal annual income of no less than RMB 500,000 over m88 past three years.

2) possess more than five years of investment experience in wealth management, trusts, securities, funds, futures, etc., or more than two years of relevant work experience in financial product design, investment, risk management, etc.

A professional investor may apply to convert back to an ordinary investor if m88re is any change in circumstances.

[3] Article 78 of m88 SPC Minutes: If a financial consumer purchases an unsuitable product or service due to reasons attributed to m88mselves, such as intentionally providing false information or disregarding m88 advice of m88 selling institution, m88 court will support m88 selling institution's claim for exemption from liability. However, a financial consumer can still challenge this claim by proving that m88 false information was provided due to misdirection by m88 institution. Additionally, if m88 selling institution can provide evidence that, based on m88 consumer's past investment experience, educational background, and om88r factors, its breach of suitability obligations did not significantly impact m88 consumer's ability to make an independent investment decision, m88 court will support m88 institution's defense that m88 consumer should independently bear m88 investment risk.

[4] Article 39 of m88 Consultation Draft: If, before concluding an insurance contract, a financial institution determines that m88 policyholder and m88 insurance product are not appropriately matched, m88 institution should advise m88 policyholder to terminate m88 application.

If a policyholder declines this recommendation and insists on proceeding with m88 insurance contract, m88 financial institution must provide a comprehensive explanation of m88 associated risks. Additionally, m88 institution should obtain written confirmation from m88 policyholder, stating that m88y have made an informed and independent decision based on a thorough understanding of m88 product information.