In the financial sector of the People's Republic of China (PRC), the People’s Bank of China has historically assumed multiple functions such as monetary policy, financial operations, and organisational management. With the complexity of the financial risk structure, the problem of lack of co-ordination and lack of supervision in financial supervision has emerged. In 2017, the Financial Stability and Development Committee of the State Council (the "Financial Committee") was established to co-ordinate the major issues of financial reform, development and supervision, and to enhance the authority and effectiveness of financial supervision.
In the banking sector, the regulators responsible for supervising banks in mainland China are the People's Bank of China (PBOC), the China Banking and Insurance Regulatory Commission (CBIRC) as well as the State Administration of Foreign Exchange (SAFE).
The PBOC is the PRC’s central bank, with primary responsibilities including the formulation and implementation of monetary policies, and maintaining the stability of the banking industry. The CBIRC is the main agency for the supervision of banking institutions in the PRC. SAFE is mainly responsible for foreign exchange administration.
The principal laws and regulations governing the mainland China’s banking sector are:
In order to conduct banking service, a Chinese firm may apply for a separate financial licence and a separate business licence. The financial licence is issued by the CBIRC to specially permit carrying out banking financial business in China.
Activities and Services Covered
According to Article 3 of the Law of Commercial Banks, once authorised, a commercial bank may conduct the following business activities in part or in whole:
Conditions for Authorisation
Pursuant to the Law of Commercial Bank, requirements for establishing a commercial bank include:
The Process for Applying
According to the Law of Commercial Banks, following materials shall be firstly submitted to the CBIRC:
Once the above-mentioned materials are submitted, an applicant shall fill in a formal application, attaching the following documents and materials:
Timelines and Costs for Authorisation
According to the Measures for the Administration of Licenses of Banking and Insurance Institutions (2021), a banking institution formed with approval shall, within ten days from the date of receiving an administrative licensing decision, obtain a licence from CBIRC or its local office.
As for foreign applicants, according to the PRC Regulation on the Administration of Foreign-Funded Banks, CBIRC shall, within two months of receipt of the complete application materials, make a decision as to whether approve it or not, and notify the applicant in writing.
Currently, pursuant to Chinese effective laws and regulations, there is no cost for applying the financial licence.
Once approved, the CBIRC or its local offices shall issue financial licenses.
According to the Law of Commercial Banks, the alteration of shareholders who hold more than 5% of the total amount of capital or shares of a commercial bank shall be subject to the approval of the banking regulatory organ of the State Council.
The Interim Measures for the Equity Management of Commercial Banks issued in 2018 (the "Measures") is the implementation rules for management of commercial bank equity, which has set different regulatory conditions according to the different shareholding ratios for the commercial banks’ shareholders. The Measures have tightened the CBIRC's regulation of the information disclosure and reporting requirements imposed on material shareholders that have a significant impact on the operation and management of commercial banks established in China. Pursuant to the Measures, shareholders who hold more than 5% of the shares or voting rights of a commercial bank, or hold less than 5% of the total capital or total shares but have a significant impact on the operation and management of the commercial bank will be regarded as the major shareholders of the commercial bank and shall be managed in accordance with the relevant regulations of the Measures.
According to Implementation Measures for the Administrative Licensing Items concerning Chinese-Funded Commercial Banks (2018 Amendment), the equity change of a Chinese-funded commercial bank must meet the following review, acceptance or reporting requirements:
State-owned commercial bank, the postal savings bank or a joint-stock commercial bank
An application for the change of a shareholder holding 5% or more of the total capital or shares, or an application for an overseas financial institution’s equity investment shall be accepted, reviewed and decided by the CBIRC.
An application for the change of a shareholder holding 1% or more but less than 5% of the total capital or shares shall be reported to the CBIRC within ten days after the equity transfer.
Urban commercial banks
An application for the change of a shareholder holding 5% or more of the total capital or shares, or an application for an overseas financial institution’s equity investment shall be accepted, reviewed and decided by the local provincial CBIRC branch agency.
An application for the change of a shareholder holding 1% or more but less than 5% of the total capital or shares shall be reported to the local provincial CBIRC branch agency within ten days after the equity transfer.
According to Regulation on the Administration of Foreign-Funded Banks (2019 Amendment), when a foreign-funded bank changes its shareholders or adjusts the shareholding proportion of its shareholders, it shall be subject to the approval of the CBIRC, shall submit application materials as required, and undergo the relevant registration procedure with the administration for market regulation.
The above-mentioned review, acceptance or reporting requirements belong to administrative licensing requirements, which are compulsory requirements and mandatory obligations on banking institutions.
The Notice by the CBIRC Regarding Issuing the Corporate Governance Standards for Banking or Insurance Institutions was launched in 2021. According to Article 4 of the Notice, CBIRC requires that the banking institution shall continue raising the level of corporate governance, and gradually reach the standards of good corporate governance.
A Good corporate governance shall include without limitation the following:
Pursuant to the Notice by the CBIRC Regarding Issuing the Corporate Governance Standards for Banking or Insurance Institutions (2021), a banking institution shall, in accordance with the PRC Company Law, establish a corporate governance structure consisting of the shareholders' meeting, the board of directors, independent directors, special committees of the board of directors, the board of supervisors, senior management, and other governance bodies.
A banking institution shall disclose important information on the company, including financial condition, information on material risk, and information on corporate governance; and it shall establish a comprehensive risk management system that covers all business processes and operational steps, and is proportional to the risk condition of the company.
Corporate documents a banking institution shall prepared include the company's bylaws; the procedural rules of the shareholders' meeting, the board of directors' meeting, and the board of supervisors' meeting, as well as the company's risk tolerance, risk management, and internal control policies.
Persons required to go through the licensing process
Pursuant to Implementation Measures of the CBIRC for the Administrative Licensing Items concerning Chinese-Funded Commercial Banks, the chairman, vice chairman, independent directors, and other members of the board of directors, and the secretary to the board of directors of a Chinese-funded commercial bank shall go through the licensing for their office qualifications.
The president, vice president, assistant to president, chief risk officer, chief compliance officer, general auditor, general accountant, chief information officer, and senior executives of the same rank of a Chinese-funded commercial bank shall also go through the licensing for their office qualifications.
To apply for qualification as a director or senior executive of a Chinese-funded commercial bank, the proposed person shall meet the following basic conditions:
To apply for the qualifications of a director of a Chinese-funded commercial bank, the following additional conditions should also be met:
Process for licensing
An application for qualification as a director or senior executive of a State-owned Commercial Bank, a Postal Savings Bank, a Joint-stock Commercial Bank as well as the business department of the head office shall be submitted to the CBIRC by the banking institution, and be accepted, reviewed and decided by the CBIRC. The CBIRC shall make a written decision on approval or disapproval within 30 days from the date of acceptance.
The application for the qualifications of directors and senior management personnel of urban commercial bank institutions, their branches, and their branch-level franchised institutions shall be submitted by the urban commercial bank institutions to the CBIRC’s local or city-level dispatched institution or to the CBIRC’s provincial-level dispatched institution for acceptance and preliminary review. The CBIRC’s provincial dispatched agency shall review the application and make a decision. The provincial dispatched agency shall make a written decision of approval or disapproval within 30 days from the date of receipt of the complete application materials.
Where the proposed person has previously served as the chairman of the board of directors or a senior manager of a financial institution, the applicant shall submit the proposed person’s resignation audit report or economic responsibility audit report when submitting the qualification application materials.
A director, senior executive, or chief representative of a foreign-funded bank shall not take office before his office qualification is confirmed by the CBIRC or the local CBIRC office at the place where it is located.
A proposed person shall not serve as director, senior executive, or chief representative of a foreign-funded bank if they:
After a foreign-funded bank submits the application materials for confirmation of satisfaction of office qualifications, the CBIRC or the local CBIRC office at the place where it is located may hold an interview with the proposed person before he holds office.
Directors, senior executives and chief representatives of a foreign-funded bank that must be subject to confirmation of satisfaction of office qualifications shall be governed by the provisions of the rules on administrative licensing of foreign-funded banks.
A director of a banking or insurance institution shall perform the following duties or obligations:
An senior management officer of a banking institution shall comply with laws, regulations, regulatory provisions, and the company's bylaws, engage in proper professional conduct, abide by high standards of professional ethics, have obligations of loyalty and diligence to the company, perform duties in good faith, dutifully, and prudentially, and guarantee that they have sufficient time and energy to perform duties, and may not be slack in performing duties or perform duties beyond authority.
The Banking Institutions Remuneration Requirements
Regarding remuneration requirements, China has issued the Notice of CBIRC on Issuing the Supervisory Guidelines on Sound Compensation in Commercial Banks (2010), which can be applied to all the employees of banking institutions, and the Notice by the CBIRC of Issuing the Guiding Opinions on Establishing and Improving the Mechanism of Banking and Insurance Institutions for the Recourse and Deduction of Performance-Based Compensation (2021), which mainly applies to directors and supervisors who receive performance-based compensation from banking institutions, senior executives and personnel holding key positions in the banking institutions.
A commercial bank shall design a uniform compensation management system, which shall be composed of fixed compensation, variable compensation, fringe benefits, etc. Fixed compensation is the basic compensation. The variable compensation includes performance-based compensation and various mid- and long-term incentives. Fringe benefits include insurance premiums and housing accumulation fund.
The compensation mechanism shall be in line with the following principles:
Compensation management system
The compensation management system shall include:
Under any of the following circumstances, a banking institution shall recover and deduct the performance-based compensation of senior executives and personnel holding key positions with main responsibility during the corresponding period, in whole, and recover and deduct the performance-based compensation of other responsible persons during the corresponding period, in part:
The Regulators' Supervisory Regime
The CBIRC shall take the compensation management of a commercial bank as an important item of corporate governance and assess the soundness and effectiveness of the compensation management mechanism of the commercial bank once a year. The CBIRC shall also monitor the dynamic information about implementation of the compensation management system of commercial banks, and conduct on-site inspection of the commercial banks' execution of the risk control indicators and other indicators for assessment.
Consequences of Breaching the Requirements
According to Notice of CBIRC on Issuing the Supervisory Guidelines on Sound Compensation in Commercial Banks, if the compensation management system and the performance assessment indicators of a commercial bank do not meet the relevant provisions, the CBIRC has the power to order it to make a correction under relevant provisions of the PRC Banking Supervision Law, and investigate and deal with the following problems:
China launched the Measures for the Supervision and Administration of Combating Money Laundering and Financing of Terrorism by Financial Institutions in 2021, in which stipulates the internal control and risk management by financial institutions, the supervision and administration of combating money laundering and financing of terrorism and corresponding legal liabilities.
The main requirements include that a financial institution shall establish and improve the internal control system for combating money laundering and financing of terrorism, assess risks of money laundering and financing of terrorism, establish a risk management mechanism commensurate with the risk status and business scale, build an information system for combating money laundering, and establish or designate a department and appoint corresponding personnel to effectively perform the obligations of combating money laundering and financing of terrorism.
Specifically, the financial institutions shall establish and improve an internal control system for combating money laundering and financing of terrorism, and self-assess risks on a regular and irregular basis and report the self-assessment situation to the PBOC and its relevant branch office. The financial institutions shall also set up special departments to take the lead in conducting the management work of combating money laundering and financing of terrorism, establish an audit mechanism for combating money laundering and financing of terrorism.
The PBOC and its branch offices shall, under the risk-based principle and principle of regulating legal persons, rationally use various regulation methods to realise effective regulation of different types of financial institutions. The PBOC and its branch offices may also notify the CBIRC or its dispatched institutions of the supervision and administration of financial institutions' combating money laundering and financing of terrorism.
When a financial institution violates the relevant provisions of these Measures, the PBOC or its branch offices shall recommend the CBIRC punish them according to the PRC anti-Money laundering law:
The Law of Commercial Banks has set up a special chapter for the protection of depositors.
According to The Law of Commercial Banks, regarding protections for the depositors, commercial banks shall follow the principles of voluntary deposit and free withdrawal, paying interest to depositors and keeping secret for depositors in handling individual savings deposits.
Commercial banks have the right to refuse any entity or individual to inquire about, freeze or deduct individual savings accounts or account of an enterprise, unless it is otherwise prescribed by laws.
A commercial bank shall determine its own interest rates in accordance with the upper and lower limits for deposit interests set by the People's Bank of China and make announcement.
A commercial bank should pay a certain amount of deposit reserve fund to the People's Bank of China and keep adequate payment funds in accordance with the provisions of the PBOC.
A commercial bank shall guarantee the payment of principals and interests of the deposits, and shall not delay or refuse to pay the principals or interests of the deposits.
Deposit Insurance System
In 1993, China proposed a deposit insurance system for the first time. The Deposit Insurance Regulations implemented in May 2015 stipulate that the insurance premiums for deposit insurance shall be collected and managed by the PBOC, and deposit insurance institutions are also established within the PBOC.
The deposit insurance system is a financial security system. It is an insurance institution established by various depository financial institutions.
Each depository institution, as an insured member, pays insurance premiums to the insurance institution according to a certain deposit ratio, establishes deposit insurance reserves, and acts as a member institution. In the event of a business crisis or bankruptcy of the member institution, the deposit insurance institution shall provide financial assistance or directly pay part or all of the deposit to the depositor.
According to the Deposit Insurance Regulation, the deposit insurance has a coverage limit, and the maximum amount of coverage is CNY500,000. The PBOC may, together with relevant departments under the State Council, adjust the maximum amount of coverage in view of factors such as economic situation, changes in the deposit structure, and financial risk status, but shall submit it to the State Council for approval before publication and implementation.
If the amount of principal and interest of deposits in all insured deposit accounts owned by the same depositor at the same institutional policyholder is less than the maximum amount of coverage, the deposits shall be paid in full. The portion in excess of the maximum amount of coverage shall be paid with the liquidated property of the institutional policyholder.
Upon paying the insured deposits of a depositor, the deposit insurance fund management institution acquires the depositor's claim against the institutional policyholder in the same order of liquidation.
According to the Law of Commercial Banks, in handling individual savings deposits, commercial banks shall follow the principles of keeping secret for depositors. The Law also stipulates that no employee of a commercial bank may divulge any state or commercial secret they acquire during their term of service.
According to the Implementation Measures of the PBOC for Protecting Financial Consumers' Rights and Interests, The bank or payment institution and its employees shall strictly keep confidential consumers' financial information, and shall not divulge such information or illegally provide such information to any other person. When it is confirmed that the information is divulged, damaged or lost, the bank or payment institution shall immediately take remedial measures; if the leakage, damage or loss of information is likely to endanger the personal or property safety of financial consumers, the bank or payment institution shall immediately report to the PBC branch office at the place of its domicile and inform financial consumers. If the leakage, damage or loss of any information may have any other adverse impact on financial consumers, it shall inform financial consumers in a timely manner, and report to the PBOC branch office at the place of its domicile within 72 hours. The PBOC branch office shall, after receiving the report, handle it in accordance with Article 55 of these Measures as the case may be, which will be demonstrated below.
Pursuant to the recently implemented PRC Personal Information Protection Law, personal information processors, including banking institutions, shall, on the basis of the purposes and methods of processing of personal information, categories of personal information, the impacts on individuals' rights and interests, and potential security risks, take the following measures to ensure that personal information processing activities comply with the provisions of laws and administrative regulations, and prevent unauthorised access to as well as the leakage, tampering or loss of personal information:
Where leakage, tampering or loss of personal information occurs or may occur, a personal information processor, including banking institutions, shall immediately take remedial measures, and notify the authority performing personal information protection functions and the relevant individuals. The notice shall include the following matters:
According to the PRC Personal Information Protection Law, under the following circumstances, the personal information processors, including banking institutions, may process personal information with no personal consent required:
Consequences of Breach
According to the Law of Commercial Banks, where any employee of a commercial bank divulges state or commercial secrets he acquires during his service, he shall be imposed disciplinary punishment; or shall be subject to criminal liabilities if his act is so serious as to constitute a crime.
As for banking institutions, according to Article 55 of the Implementation Measures of the PBOC for Protecting Financial Consumers' Rights and Interests as mentioned above, where a bank or payment institution infringes upon financial consumers' lawful rights and interests, such as that the personal information is divulged, damaged or lost, the PBOC or its branch office may take the following measures:
On 3 May 2011, the CBIRC issued the Guiding Opinions on the Implementation of New Regulatory Standards in China’s Banking Sector. In June of 2012, the Administrative Measures for the Capital of Commercial Banks (Trial) was launched, which marked the beginning of China’s formal implementation of the Basel Agreement III. Later in 2015, the CBIRC launched the Measures for the Liquidity Risk Management of Commercial Banks, which was amended in 2018. The regulatory requirements set by China's banking regulatory authorities can already cover the requirements of Basel III standards, and most banks have already met these requirements.
Quantity and Quality of Capital Requirements
According to Administrative Measures for the Capital of Commercial Banks (for Trial Implementation), capital adequacy ratio regulation requirements for commercial banks include minimum capital requirement, capital reservation buffer and countercyclical capital requirements, additional capital requirement for systematically important banks, and capital requirement under the Second Pillar.
Commercial banks' capital adequacy ratio at each tier must meet the following minimum requirements:
Commercial banks shall set aside a capital reservation buffer after meeting the minimum capital requirements. Capital reservation buffer shall be 2.5% of risk-weighted assets and be fulfilled by Core Tier 1 capital.
Under specified circumstances, commercial banks shall set aside countercyclical capital after meeting the minimum capital requirement and the capital reservation buffer requirement. Countercyclical capital shall be 0-2.5% of risk-weighted assets and be fulfilled by Core Tier 1 capital.
The additional capital of domestic systematically important banks shall be 1% of risk-weighted assets and be fulfilled by Core Tier 1 capital.
As for the capital requirements under the Second Pillar, the CBIRC shall have the power to, in light of the operational risk management level and the occurrence of operational risk events of a single commercial bank, raise the regulatory capital requirements for operational risk.
Pursuant to Measures for the Liquidity Risk Management of Commercial Banks, liquidity risk supervisory indicators include liquidity coverage ratio (LCR), net stable funding ratio (NSFR), liquidity ratio, liquidity matching ratio, and adequacy ratio of HQLA.
A commercial bank with an asset size of not less than CNY200 billion shall continuously meet the minimum supervisory standards for LCR, NSFR, liquidity ratio and liquidity matching ratio. A commercial bank with an asset size of less than CNY200 billion shall continuously meet the minimum supervisory standards for adequacy ratio of HQLA, liquidity ratio and liquidity matching ratio.
The supervisory indicator of LCR is designed to ensure that a commercial bank has adequate qualifying HQLA which can be monetised to meet the future liquidity needs of, at a minimum, 30 days under the liquidity stress scenarios as prescribed. The minimum supervisory standard of LCR shall not be lower than 100%.
The supervisory indicator of NSFR is designed to ensure that a commercial bank has adequate sources of stable funds to meet the needs of various types of assets and off-balance-sheet risk exposure for stable funds. The minimum supervisory standard of NSFR shall not be lower than 100%.
The minimum supervisory standard of liquidity ratio shall not be lower than 25%. The supervisory indicator of liquidity matching ratio measures the maturity allocation structure of the major assets and liabilities of commercial banks, and is designed to direct commercial banks to rationally allocate long-term stable liabilities and high-liquidity or short-term assets, avoid over-reliance on short-term funds in supporting the development of long-term business, and improve their liquidity risk withstanding capacity. The minimum supervisory standard of liquidity matching ratio shall not be lower than 100%.
The supervisory indicator of adequacy ratio of HQLA is designed to ensure that a commercial bank maintains adequate unencumbered HQLA which can be monetised to meet the future liquidity needs within the coming 30 days in times of stress. The minimum supervisory standard of the adequacy ratio of HQLA shall not be lower than 100%.
Risk Management Rules
Risk management rules on quantity and quality of capital requirements
According to Administrative Measures for the Capital of Commercial Banks (for Trial Implementation), commercial banks shall have a sound risk management framework and a robust internal capital adequacy assessment process, specify the risk governance structure, prudentially assess various risks, capital adequacy levels and capital quality, and develop capital plans and capital adequacy ratio management plans to ensure that their capital is sufficient to resist risks facing them and meet the needs for business development.
The CBRC shall implement supervisory inspection on capital adequacy ratios of commercial banks to ensure that their capital is able to sufficiently cover all risks facing them. Supervisory inspection on capital adequacy ratios includes but is not limited to:
As for the disclosure requirement, capital adequacy ratio information disclosure shall, at a minimum, cover:
Risk management rules on liquidity requirements
According to the Measures for the Liquidity Risk Management of Commercial Banks, a commercial bank shall, at the legal entity levels, establish a liquidity risk management system commensurate with the scale, nature, and complexity of its business. The liquidity risk management system shall include the following basic elements:
The CBIRC shall conduct analysis and monitoring of the liquidity risk of commercial banks and the banking system on a regular basis, in terms of the asset-liability maturity mismatch, degree of diversification and stability of funding sources, unencumbered assets, and liquidity risk profile of significant currencies of commercial banks, and the market liquidity, among others. The CBIRC shall take into full consideration the limitations of a single liquidity risk supervisory indicator or monitoring tool in reflecting the liquidity risk of commercial banks, and make comprehensive use of a variety of methods and tools to analyse and monitor liquidity risk. The CBIRC may, in consideration of the development strategies, market positioning, business model, asset and liability structure and risk management capability of a commercial bank, set differentiated monitoring early warning values or early warning intervals for all or part of the monitoring tools, and at the appropriate time, issue risk alerts or require the bank to take relevant measures.
As for the disclosure requirement, the Measures for the Liquidity Risk Management of Commercial Banks requires that a commercial bank shall, according to the applicable provisions, disclose on a regular basis the information on its liquidity risk level and the management status thereof, including but not limited to the following:
Additional Requirements Applicable to Systemically Important Banks
Expect for what mentioned above that the additional capital of domestic systematically important banks shall be 1% of risk-weighted assets and be fulfilled by Core Tier 1 capital. China has launched the Additional Supervision Regulations for Systemically Important Banks (for Trial Implementation, effective on 1 December 2021), in which clearly put forward additional regulatory requirements for systemically important banks.
On the basis of meeting minimum capital requirements, capital reservation buffer and countercyclical capital requirements, systemically important banks should also meet certain additional capital requirements, which are met by core Tier 1 capital. Systemically important banks are divided into five groups. Banks in the first to fifth groups are subject to additional capital requirements of 0.25%, 0.5%, 0.75%, 1%, and 1.5%, respectively. If a bank is recognised as both a China's systemically important bank and a global systemically important bank, the additional capital requirements are not superimposed, and the principle of the higher of the two is used to determine.
On the basis of meeting the requirements for leverage ratios, systemically important banks shall additionally meet the requirements for additional leverage ratios. The additional leverage ratio requirement is 50% of the additional capital requirement of systemically important banks, which is met by Tier 1 capital.
The PBOC shall strengthen the monitoring, analysis and risk assessment of systemically important banks on the basis of consolidation, including:
The CBIRC implements consolidated supervision and management of systemically important banks in accordance with the law, and implements strengthened supervision requirements.
The Principal Means of Resolving a Failing Bank
According to the Law of Commercial Banks, Where a commercial bank is unable to pay the debts due, it may be adjudicated bankrupt by the people's courts according to law with the consent of the banking regulatory organ of the State Council. In this process, the people's courts shall organise the banking regulatory organ of the State Council and other relevant departments and personnel to form a liquidation group to make liquidation. In the bankruptcy liquidation of a commercial bank, the bank shall, after paying the liquidation expenses, the wages of the employees, and labour insurance fees, pay in priority the principals and interests of individual savings deposits.
The FSB Key Attributes of Effective Resolution Regimes
The Financial Stability Board (FSB) issued a series of documents such as "Reducing the Moral Hazard of Systemically Important Financial Institutions", "Intensity and Effectiveness of Supervision of Systemically Important Financial Institutions", and "Key Attributes of Effective Resolution Regimes".
In respond of this, China has formulated the "Guiding Opinions on Improving Supervision Regulation of Systemically Important Financial Institutions".
The "Guiding Opinions on Improving Supervision Regulation of Systemically Important Financial Institutions" mainly cover three aspects: First, scientific evaluation, and reasonable identification of financial institutions that have a systemic impact on the stability of the financial system. The second is to strengthen supervision and reduce the possibility of major risks in systemically important financial institutions. The third is to establish a special resolution mechanism to ensure that systemically important financial institutions can be safely, quickly and effectively handled when major risks occur, and to ensure that their key businesses and services are not interrupted.
Insolvency Preference Rules Applicable to Deposits
As mentioned above, the insolvency preference rules applicable to deposits is stipulated in the Law of Commercial Banks, which is that in the bankruptcy liquidation of a commercial bank, the bank shall, after paying the liquidation expenses, the wages of the employees, and labour insurance fees, pay in priority the principals and interests of individual savings deposits.
Regulating Internet Financial Services
The “Interim Measures for the Administration of Internet Loans of Commercial Banks”, the “Notice by the General Office of the CBIRC of Further Regulating the Internet Loan Business of Commercial Banks” and the ”Notice of Further Regulating the Supervision and Administration of Online Consumer Loans for College Students” issued recently by the issued recently by the Chinese banking regulatory authorities has a disruptive impact on the field of Internet finance.
The Chinese banking regulatory authorities has always adhered to the following principles for the rectification of the online platform enterprises’ financial business:
Focus will be put on supporting network platform enterprises to uphold innovation and standardise development under the premise of prudential supervision, and at the same time, to resolutely break monopoly and maintain
The main purpose of these policies is to raise the threshold for financial institutions and internet platform companies to carry out joint loan business cooperation, restrict financial institutions from conducting fixed deposit and time-demand deposit business through third-party internet platforms, and essentially cancel the sales of wealth management products by internet platform companies as agents. These policies will completely change the business model of internet platform companies relying on the advantages of technology, high leverage, high returns.
Resolving the Risks of Shadow Banking
Banking financial institutions have implemented the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions, gradually cleaned up and reduced non-compliant off-balance sheet financial management investment on non-standard asset, on-balance sheet specific purpose carrier investment, inter-bank financial management and other business scales, and strictly control bank-trust channel business. The corresponding risk classification, capital appropriation, and provisioning requirements have been strictly applied to resolve shadow banking risks in an orderly manner.
Improving the Protection of Financial Consumer Rights
In September 2020, the PBOC issued the Implementation Measures for Protecting Financial Consumers' Rights and Interests. In July 2021, the CBIRC issued the Measures for the Supervision and Evaluation of the Protection of Consumer Rights and Interests of Banking Insurance Institutions. The above-mentioned rules and regulations require financial institutions to establish rules and regulations on the protection of financial consumers' rights and interests, clarify relevant codes of conduct, establish the internal control over personal financial information protection, financial product and service information disclosure mechanism, financial consumer risk level assessment, complaint acceptance and handling process, and popularisation of financial knowledge and the education of financial consumers.
At the same time, with the PRC Personal Information Protection Law comes into effect, the responsibilities of financial institutions in the protection of personal financial information will gradually become stricter. When collecting personal financial information, financial institutions shall follow the principles of lawfulness, reasonableness and necessity, shall strictly fulfil the obligation of information confidentiality, and properly comply with laws, regulations and the scope authorised by users to process, custody, store and use personal financial information.
Strengthening the Compliance Risk Management of Digital Financial Services
Financial regulatory agencies will strengthen the supervision of financial technology and formulate higher compliance requirements for commercial banks to carry out digital financial services. Many commercial banks have previously experienced risk incidents and suffered heavy penalties due to loopholes in their compliance and internal control mechanisms. For this reason, commercial banks should strengthen their compliance risk management.
Developing Green Finance
Banking financial institutions will establish and improve environmental and social risk management systems, incorporate environmental, social, and governance (ESG) requirements into the entire process of credit granting, and improve professional green finance service capabilities and risk prevention and control capabilities. Banking financial institutions shall also actively develop energy efficiency credit, green bonds and green credit asset securitisation, steadily carry out environmental rights and ecological compensation mortgage financing, establish green development funds in accordance with laws and regulations, and explore carbon finance, climate bonds, blue bonds, environmental pollution liability insurance, and climate Innovative green financial products to support the development of green, low-carbon and circular economy.