On July 18, 2015, the People’s Bank of China, the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry of Finance, the State Administration for Industry and Commerce, the Legislative Affairs Office of the State Council, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Insurance Regulatory Commission and the China Internet Information Technology Office jointly issued the Guideline Opinions on Promoting the Healthy Development of Internet Finance (the “Guidelines”). The Guidelines are the most formal and comprehensive guidelines issued by high-level Chinese state authorities in the area of Internet finance. The fact that 10 regulatory agencies jointly issued the Guidelines represents the importance the Chinese government has placed on the development of Internet finance, along with its intent to start regulating the area.
The Guidelines aim to encourage innovation and to support the steady development of Internet finance. In the Guidelines, the central authorities convey the following opinions:
- The Guidelines encourage innovation of Internet Finance platforms, products and services, provided they are compliant with the law.
- Internet finance is inclusive finance, meeting the demands of micro, small and medium-sized enterprises or individuals.
- The Guidelines encourage cooperation between traditional financial institutions and Internet finance enterprises, as well as innovation in the products and services offered by traditional financial institutions.
- The Guidelines encourage investment from society into Internet finance enterprises, and participation by Internet finance enterprises in domestic capital markets. They also encourage financial banking institutions to provide financial policies to Internet finance start-ups.
- All government departments shall provide high quality and efficient services to Internet finance enterprises.
- Financial and tax policies will gradually become clearer, and preferential policies will be offered based on principles of fairness.
- Qualified Internet finance enterprises will have access to basic financial credit information databases. Internet finance enterprises will be allowed to apply for a license to operate credit score businesses pursuant to the law.
- Regulatory oversight and responsibilities shall be as follows:
- Internet payment services – the People's Bank of China;
- Online lending (including P2P online lending and micro-lending) Internet trusts and Internet consumer finance – the China Banking Regulatory Commission;
- Equity crowd-funding and Internet sales of financial products – the China Securities Regulatory Commission;
- Internet insurance – the China Insurance Regulatory Commission.
- To strengthen industry self-regulation, the People’s Bank of China shall establish the China Internet Finance Association in conjunction with relevant departments.
Legal Parameters of Internet Finance
The Guidelines set forth the following legal parameters for Internet finance platforms, which will serve as a basis for more detailed regulatory rules to be enacted in the future.
- Any enterprise or individual that intends to establish a website that provides Internet financial services is required to complete financial regulatory procedures, as well as website record-filing procedures with the telecommunications authorities. This effectively means that Internet finance will probably be subject to a licensing regime, with specific requirements to be determined by detailed regulatory rules in the future. Detailed information disclosure to platform users is required. Internet finance operators are required to fully disclose their business model, financial status, and transaction models to users. The rights and obligations of users and sufficient disclaimers are also required to be disclosed to users.
- Users of Internet finance platforms are defined as consumers. Therefore, Internet finance platform operators are required to establish relevant rules and protocols to protect consumers.
- Internet finance operators are required to implement effective technical safety measures.
- They are required to store and protect client and transaction information, and are prohibited from selling or divulging a client’s personal information. This means that Internet finance operators are required to protect the confidentiality of client information, falling which they would be subject to legal liability.
- Internet finance operators are required to implement effective measures to identify clients, proactively monitor and report suspicious transactions, and comply with anti-money laundering laws. This means that Internet finance platforms are “specific non-financial institutions that shall abide by anti-money laundering laws” as set forth in China’s Anti-Money Laundering Law.
- Information about payment systems on Internet finance platforms are required to be fully and accurately disclosed to users. In addition, there should be disclaimers the business risk of using such payment systems.
- P2P online lending institutions are required to specify that they are mainly providing a platform for direct lending between borrowers and lenders, and they are not offering credit enhancement services or a means for users to engage in illegal fund-raising.
- Equity crowd-funding activities are required to be done via crowd-funding intermediary platforms (Internet websites or other similar electronic media). Only micros and small-sized enterprises can raise funds through crowd-funding. Medium and large scale enterprises may not engage in crowd-funding activities. There should be standards set for determining who can invest, and all investments made should be small in size.
- With respect to the sale of financial products online, if the fund offers returns through other activities, the fund is required to identify such returns, their prerequisites, and the circumstances by which they are offered and used, in each case in a comprehensive, truthful and accurate manner. Such other activities may not be comingled with the fund’s financial products.
- Insurance companies that sell insurance products online cannot make false statements, advertise past performance in a one-sided or exaggerated manner, promise returns or undertake to bear losses in violation of law, or provide other misleading information.
- Regulatory requirements on trusts still apply to trust companies that sell products and engage in other trust businesses online.
As the Guidelines only provide general guidance, there are a few unresolved issues that still need to be clarified, as follows:
- A number of financial products that are currently offered on P2P platforms do not fit the definition of “online lending.” Examples include financial lease products or the transfer of factoring rights. There is an open question about how these products will be handled by government authorities.
- The Guidelines prohibit P2P online lending platforms from providing credit enhancement services, but it is unclear whether a platform that provides guarantees though guarantee companies or a third party would be in violation of this provision.
- The Guidelines only mention equity crowd-funding, but does not address other forms of crowd-funding that have arisen in the market such as product and income rights crowd-funding.
- The Guidelines state, “unless otherwise specified, Internet finance enterprises shall select qualified banking financial institutions as their funds depository to manage and oversee client funds, and to manage client funds and the enterprise’s proprietary funds under separate accounts”. However, currently most Internet finance enterprises use third-party payment institutions as their funds depository, with banks unable to fulfill such obligation whether due to cost or convenience. There is a question as to whether “qualified financial institutions” includes these third-party payment institutions, and if not, how best to bring the current market practice into compliance.
The Guidelines represent the first time that central Chinese authorities have supported Internet finance. The Guidelines establish basic administrative, tax, and legal policies with the goal of supporting and encouraging Internet finance. We will continue to pay close attention to regulatory developments as more detailed rules are introduced by authorities.