(Yicai) June 21 -- China’s small and mid-sized banks that have no separate wealth subsidiary are facing pressure to phase out their wealth management operations, Yicai learned from sources in the banking industry, amid efforts by regulators to reduce risks in the banking system.

Reuters reported yesterday that China's banking regulator has given small lenders a 2026 deadline to stop selling wealth management products unless they have a separate dedicated subsidiary. This is largely accurate, the representatives of several commercial banks told Yicai, though there has been no official document saying this.

A representative for a bank in Central China said small and medium-sized banks without a wealth management unit had already been told to cease adding new wealth management business.

Wealth management balances at small and mid-sized banks without such subsidiaries is relatively small at the moment. Some 258 banks and 31 wealth management firms had a total of 39,800 WMPs, with a total operating scale of CNY26.80 trillion (USD3.7 trillion), at the end of last year.

But this is dominated by the dedicated wealth management companies, whose operating scale is CNY22.47 trillion, accounting for almost 84 percent of the total.

The new requirement will have a big impact only for those small and medium-sized banks that have a substantial interest, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Company.

Dong said financial regulators should look into new ways for these banks banks to set up wealth management units, and they should speed up the approval of a batch of qualified smaller lenders to operate in the area.

Industry insiders noted there is already a trend in the banking sector for wealth managers to be the main operators of the business, with banks gradually withdrawing from the market and serving merely as sales agents.

Under this model, a bank accepts a mandate from a wealth manager to sell related products on their behalf, while only providing ancillary services and collecting fees.

Dong pointed out that for most small and mid-sized banks, setting up a wealth management company is challenging, but they should seize the opportunity to do this and gain a head start in the market, as WMP sales have not yet been opened to third parties.

Editor: Tom Litting