Financial Services Compliance in China

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Regulatory framework

Regulatory authorities

What national authorities regulate the provision of financial products and services?

China adopts a sector-based regulatory model for financial services, with separate regulators for banking, securities and insurance services. The regulators include the People’s Bank of China (PBOC) as the central bank of China, the China Banking Regulatory Commission (CBRC) for banking services and certain non-banking financial services, the China Securities Regulatory Commission (CSRC) for securities-related services and the China Insurance Regulatory Commission for insurance services. The four regulators form the ‘One Bank and Three Commissions’, all of which are under the leadership of and report to the PRC State Council.

In addition to the One Bank and Three Commissions, several other government agencies are involved in financial regulation. The State Administration of Foreign Exchange (SAFE), which reports to both the PBOC and the State Council, is responsible for routine supervisory and regulatory work of foreign exchange. The National Development and Reform Commission is responsible for the approval of enterprise bonds. Financial offices and bureaux under local governments are charged with regulation of certain types of financial institutions and local financial markets.

Further, various sectoral associations are entrusted with limited regulating powers. Most financial institutions in China are required to join one of these associations. These sectoral associations operate in accordance with their charters and are supervised by the relevant sectoral regulator. They undertake the formulation of standards and guidelines for member entities. In addition, exchanges (including the two stock exchanges, the Shanghai Stock Exchange and the Shenzhen Stock Exchange) and clearing and settlement institutions are entrusted with the powers of formulating and revising transaction-related rules, guidelines and standards

There are ongoing discussions about reforming the current sector-based regulatory model, which has some regulatory gaps and overlaps. On 14 July 2017, the State Council established the Financial Stability and Development Commission in order to improve regulatory coordination between sectoral regulators. The commission serves to coordinate regulatory policies among the four sectoral regulators and supervise financial regulators and local governments.

What activities does each national financial services authority regulate?

As the central bank, the PBOC oversees the PRC financial system. As with most central banks around the world, the PBOC formulates monetary policies and exercises control over financial markets through monetary tools, such as interest rates, deposit reserves and open market operations. The PBOC also exercises certain supervisory powers, including supervision and administration of the PRC interbank lending market, interbank bond market, interbank foreign exchange market, gold market and financial payment and clearance systems. In addition, the PBOC supervises and monitors the anti-money laundering work of all financial institutions.

The CBRC supervises and administers banking financial institutions (inclusive of commercial banks, urban credit cooperatives, rural credit cooperatives and policy banks) and certain non-banking financial institutions with savings or lending functions, including financial asset management companies, trust companies, enterprise group finance companies and financial leasing companies approved for establishment by the CBRC and their domestic and international operation, and financial institutions established by the aforesaid financial institutions. Activities regulated by the CBRC include the approval for establishment, change, termination and business scope of banking financial institutions and non-banking institutions; the approval or recording of services and products; and the approval of directors and senior management. The CBRC also formulates rules for prudent operation of banking and non-banking financial institutions, including rules in connection with risk management, internal control, capital adequacy, asset quality, loan loss provisioning, risk concentration, connected transactions and liquidity management of assets.

The CSRC regulates activities in connection with securities and securities investment funds and supervises and administers participants in these activities, including stock exchanges, securities companies, securities investment funds management companies, securities registrar and clearance institutions, securities service institutions and their operations.

The SAFE is the competent government agency for regulation of foreign exchange. It is responsible for drafting laws and regulations in connection with foreign exchange control and supervising and administering foreign exchange markets, including foreign exchange market entry and foreign exchange operations.

Local financial offices and bureaux supervise small loan companies, financial leasing companies, financial guarantee companies, local asset management companies, commercial factoring companies, pawn shops, and regional financial markets and their operations.

What products does each national financial services authority regulate?

Products and services regulated by the PBOC include interbank bonds, interbank foreign exchange, gold, clearance and payment services.

The products and services regulated by the CBRC include deposits and saving, loans and other related services.

The products and services regulated by the CSRC include stocks, corporate bonds, government bonds, futures, securities investment funds and collective investment schemes.

The products and services regulated by the SAFE include retail and wholesale foreign exchange services.

The products and services regulated by local financial offices and bureaux mainly include small-amount loans, financial leasing, and property and share rights trading.

Authorisation regime

What is the registration or authorisation regime applicable to financial services firms and authorised individuals associated with those firms? When is registration or authorisation necessary, and how is it effected?

Generally, the following matters are subject to regulatory approval, although requirements may vary depending on the specific type of financial institutions:

• establishment, close, bankruptcy and dissolution of domestic and foreign-invested financial institutions and branch offices;
• establishment of foreign subsidiaries, representative offices and branch offices;
• investment in and acquisition of overseas (financial) entities;
• changes of financial institutions and their domestic branches and foreign entities (changes of name, registered capital, articles of association, domicile, shareholder with 5 per cent or more ownership);
• adjustment of business scope and products; and
• appointments of directors and senior management.

In addition, regulators also require recordal for certain matters.

Approval applications must be submitted to relevant regulators or their local counterparts, and decisions by competent authorities are made within a period of time as required by law.

Legislation

What statute or other legal basis is the source of each regulatory authority’s jurisdiction?

The major source of the PBOC’s jurisdiction is the Law on the People’s Bank of China.

The major source of the CBRC’s jurisdiction is the Law on Commercial Banks and the Law on Regulation of the Banking Industry.

The major source of the CSRC’s jurisdiction is the Law on Securities and the Regulations on the Supervision and Administration of Securities Companies.

The major source of the SAFE’s jurisdiction is the Regulations on Foreign Exchange Control.

What principal laws and financial service authority rules apply to the activities of financial services firms and their associated persons?

In addition to the laws promulgated by the PRC National People’s Congress, China’s top legislative body, and its standing committee, various regulations are promulgated by the State Council and a large number of rules promulgated by regulators. The following is an indicative list of laws, regulations and major rules for each group of institutions.

Banking financial institutions

• The Law on Commercial Banks (2015);
• the Regulations on the Banking Industry (2007);
• the Administrative Regulations on Foreign-Invested Banks (2015);
• the Provisional Regulations for the Administration of Rural Mutual Cooperatives;
• the Guiding Opinions on Clarifying the Division of Responsibility of Supervision and Management of Rural Credit Cooperatives (2004);
• the Administrative Measures on Export-Import Bank of China (2018);
• the Administrative Measures on the Agricultural Development Bank of China (2018); and
• the Administrative Measures on the China Development Bank (2018).

Non-banking financial firms

• The Trust Law (2001);
• the Measures for Administration of Financial Leasing Companies (2014);
• the Measures for Administration of Auto Financial Companies (2008);
• the Pilot Measures for Administration of Consumer Financial Companies (2013);
• the Measures for Administration of Enterprise Group Finance Companies (2006);
• the Pilot Measures for Administration of Currency Brokerage Companies (2005); and
• the Regulations on Loan Companies (2009).

Securities-related service firms

• The Securities Law (2016);
• the Securities Investment Funds Law (2015);
• the Regulations on Administration of Futures Transactions (2017);
• the Measures for Administration of Securities Investment Fund Management Companies (2012);
• the Measures for Administration of Stock Exchanges (2017); and
• the Regulations on the Supervision and Administration of Securities Companies (2008).

Foreign exchange service firms

• The Regulations on Administration of Foreign Exchange (2008);
• Regulations on the Administration of Settlement, Sale and Payment of Foreign Exchange (1996);
• the Administrative Measures for the Foreign Exchange Settlement and Sale Business of Banks (2014);
• the Administrative Measures for Personal Foreign Exchange (2006);
• the Notice of Regulations Supplemental to the Regulations on the Foreign Exchange Business of Banking Institutions and the Regulations on the Foreign Exchange Business of Non-bank Financial Institutions (1993);
• the Definitions Concerning the Scope of Foreign Exchange Business of Non-banking Financial Institutions (1996); and
• the Interim Administrative Provisions on Domestic Foreign Exchange Transfer (1997).

Interbank lending, bond and foreign exchange market participants

• The Law on the People’s Bank of China (2003);
• the Measures for Administration of Interbank Lending (2007);
• the Rules for Administration of Bond Issuance Sites in Interbank Bond Market (2002);
• the Administrative Measures for Issuance of Financial Bonds in the National Interbank Bond Market (2005);
• the Administrative Provisions for Bond Forward Transactions in the National Interbank Bond Market (2005);
• the Measures for Administration of Counter Business on National Interbank Bond Market (2016); and
• the Interim Administrative Provisions on the Interbank Foreign Exchange Market (1996).

Financial payment and clearance firms

• The Law on the People’s Bank of China (2003);
• Payment and Settlement Measures (1997);
• the Measures for Settlement by Domestic Letter of Credit (2016);
• the Notice of the People’s Bank of China on Improving Personal Payment and Settlement Services (2007);
• the Administrative Measures for Bank Card Clearing Agencies (2016); and
• the Administrative Measures for the Online Payment Business of Non-bank Payment Institutions (2016).

Scope of regulation

What are the main areas of regulation for each type of regulated financial services provider and product?

The PBOC supervises the interbank lending market, interbank bond market, interbank foreign exchange market, and financial payment and clearance market. Most of the participants in these markets are financial institutions that are monitored by the regulators of their respective sectors. In addition to the regulatory requirements from their respective regulators, the PBOC imposes regulatory requirements in connection with market entry, transactional activities, deposits and settlements in these markets.

The CBRC imposes requirements on banking institutions and non-banking financial institutions within its jurisdiction in connection with establishment and changes of institutions, business operations, corporate governance, finance and accounting, risk management and internal control, although such requirements may vary depending on the specific type of institution.

The CSRC imposes different regulatory requirements on different types of securities-related service firms. For stock exchanges, the CSRC regulates the establishment, dissolution, licensing, governance, business operation, reporting and information disclosure, formulation and revision of business rules, and finance and accounting. For securities firms, the areas of regulation include business conduct, information disclosure and reporting, establishment and change of firms and branch offices, corporate governance and internal control, investor protection, qualifications of securities practitioners, finance, and accounting and risk management. For depository and clearing services, the areas of regulation include establishment, dissolution, business conduct, business operations, corporate governance, formulation and issuance of business rules, finance and accounting and risk management and internal control. For securities service institutions (inclusive of investment consulting firms, financial consulting firms, credit ratings firms, asset evaluation firms, accounting firms and law firms), the areas of regulation include licensing for participation in securities services by securities service firms and practitioners and business conduct.

With regard to foreign exchange services, financial institutions (inclusive of banks, foreign exchange agencies, insurance companies, securities companies and enterprise group finance company) may operate foreign exchange services only after obtaining a licence from the SAFE. Financial institutions operating foreign exchange services are generally required to maintain sound business management and internal control systems, be staffed with senior managers and personnel with appropriate working experience, and have necessary venues and facilities to operate foreign exchange business.

Additional requirements

What additional requirements apply to financial services firms and authorised persons, such as those imposed by self-regulatory bodies, designated professional bodies or other financial services organisations?

There are various self-regulatory bodies in the financial sector, mainly consisting of industrial associations, clearing and settlement institutions and various types of exchanges. These self-regulatory bodies formulate guidelines, standards and rules formulated for purposes of their members’ implementation of the laws, regulations and rules of regulators, management of members and facilitation of transactions.

Major industrial associations in the financial sector include the China Banking Association, the China Trustee Association, the Securities Association of China, the Asset Management Association of China and the China Futures Association. Industrial associations promulgate guidelines for members for the purposes of compliance with laws, regulations and rules of financial regulators and formulating rules for qualifications and testing and industrial technical standards.

There are also clearing and settlement institutions and various types of exchanges in China, including the two stock exchanges (Shanghai Stock Exchange and Shenzhen Stock Exchange), futures exchanges (Shanghai Futures Exchange, Dalian Commodity Exchange, Zhengzhou Commodity Exchange, China Financial Futures Exchange), the National Equities Exchange and Quotations, the Shanghai Gold Exchange and local exchanges. The clearing and settlement institutions and exchanges are responsible for formulating and revising rules, guidelines and standards in connection with business activities, specific transactions and management of members.

Enforcement

Investigatory powers

What powers do national financial services authorities have to examine and investigate compliance? What enforcement powers do they have for compliance breaches? How is compliance examined and enforced in practice?

The PBOC and its local counterparts may conduct inspections regarding financial institutions and related entities and individuals in order to check whether PBOC policies and rules have been followed, and may require banking financial institutions to submit financial statements and statistics that are necessary for the performance of its duties.

The CBRC and its local counterparts may:

• require banking financial institutions to submit their financial statements, accounting and operation materials and audit reports;
• conduct on-site inspections, including making on-site enquiries, checking and copying relevant documents and inspecting business data systems;
• hold supervisory consultations with directors and senior managers; and
• conduct investigations in case of potential violations.

The CSRC and its local counterparts may:

• conduct onsite inspections of securities issuers and financial institutions within its jurisdictions;
• collect evidence relating to violations;
• inquire into and require explanations from a party subject to investigation and entities and individuals related to the investigation;
• check and copy transaction records, financial records and other materials in relation to a party subject to investigation and related entities and individuals; and
• check capital, securities and bank accounts.

The SAFE and its local counterparts may:

• conduct on-site inspections of financial institutions that operate foreign exchange business;
• make queries into and require explanations from entities and individuals operating foreign exchange business;
• check and copy documents and materials in connection with foreign exchange violations; and
• check bank accounts of entities and individuals subject to foreign exchange violations investigation and bank accounts of entities and individuals directly related to such violations upon approval from the SAFE or provincial foreign exchanges bureaux.

Currently, financial offices under local governments do not have enforcement powers. Financial bureaux under local governments may have limited enforcement powers in accordance with local laws. For example, according to the Shenzhen Interim Measures for the Small Loan Company Pilot Program, the Shenzhen Financial Supervisory Bureau may undertake checks and require submission of financial statements and business operation information from small-loan companies.

Disciplinary powers

What are the powers of national financial services authorities to discipline or punish infractions? Which other bodies are responsible for criminal enforcement relating to compliance violations?

The PBOC may impose administrative sanctions on entities and individuals for non-compliant activities within its jurisdiction. The sanctions it applies include warnings, confiscation of illegal gains and fines of up to five times of any illegal gains. Directors, senior managers and other persons who are directly responsible for a violation may be subject to warnings and fines up to 500,000 yuan.

The CBRC may impose administrative sanctions on entities and individuals for non-compliant activities within its jurisdiction. The sanctions include rectification orders, confiscation of unlawful gains, fines up to five times illegal gains, suspension of business, revocation of business licence, and sanctions on directors, senior managers and other persons who are directly responsible for a violation (including warning, fines up to 500,000 yuan and disqualifications).

The CBRC may impose administrative sanctions on entities and individuals within its jurisdiction for violations. The sanctions for non-compliant entities include rectification orders, warnings, confiscation of illegal gains, fines up to five times illegal gains, suspension or revocation of licence, and, for individuals engaged in non-complaint activities, sanctions can be warnings, disqualification and fines up to 600,000 yuan.

The SAFE may impose administrative sanctions on entities and individuals for violation of foreign exchange regulations. Sanctions include rectification orders, warnings, confiscation of unlawful gains, fines up to 30 per cent of illegal amount, suspension of business, revocation of business licence, and sanctions on directors, senior managers and other persons who are directly responsible for a violation (including warnings and fines up to 500,000 yuan).

Financial crimes are investigated by public security bureaux and prosecuted by people’s procuratorates. The major financial crimes included in the Criminal Law include:

• counterfeiting or altering currencies;
• selling, buying or knowingly transporting counterfeit currencies;
• knowingly holding and using counterfeit currencies;
• establishing commercial banks and other financial institutions without approval;
• forging, altering or transferring permits of commercial banks and other financial institutions;
• fraudulently obtaining credit funds from banking institutions and transferring the funds to others for purposes of making profits;
• obtaining loans, acceptance of bills, letters of credit and letters of guarantee from banks or other banking institutions;
• illegally taking in deposits from the public;
• forging or altering financial instruments, treasury certificates other securities issued by the state, or corporate/enterprise bonds;
• issuing stocks or corporate/enterprise bonds without approval;
• insider trading;
• fabricating and circulating false information that impacts securities trading and disrupts securities trading order;
• manipulating securities prices;
• illegally providing credits;
• evading foreign exchanges;
• money laundering; and
• financial fraud (inclusive of funds raising fraud, loan fraud, letter of credit fraud, credit card fraud, securities fraud and insurance fraud).

Criminal punishment for financial crimes can be up to life imprisonment.

Tribunals

What tribunals adjudicate criminal and civil financial services infractions?

Chinese courts try financial crimes. Entities and individuals sanctioned by financial regulators may appeal such sanction decisions to local people’s courts for judicial review. For civil financial disputes, parties may resolve their disputes through litigation before a Chinese court or through arbitration, if there is an arbitration agreement. Some courts have set up special divisions to adjudicate financial disputes. Many Chinese arbitration commissions, such as the China International Economic and Trade Arbitration Commission have established arbitration centres for financial disputes and formulated special arbitration rules for financial disputes.

Penalties

What are typical sanctions imposed against firms and individuals for violations? Are settlements common?

Fines and warnings are typical sanctions applied by all regulators. For example, the CBRC issued 29 sanction decisions in 2017, among which 24 decisions contained fines alone or bundled with other punishments and 11 decisions contained warnings. Among the 45 sanction decisions issued by the CSRC between June 2017 and December 2017, all of the 45 sanction decisions contained fines and 23 contained warnings. The fines rendered by the CSRC in 2017 ranged from 30,000 yuan to more than 97 million yuan.

Settlements in administrative enforcement actions are not common in China. The CSRC promulgated the Administrative Settlement Pilot Programme Implementation Measures (CSRC Administrative Settlement Measures) on 29 March 2015, to commence the administrative settlement pilot programme in securities and futures enforcement actions. The CSRC Administrative Settlement Measures provide that administrative settlement can be applied to cases that satisfy the following four conditions:

• the CSRC has opened a case and completed necessary investigation procedures, but the facts or legal relationships are still not entirely clear;
• administrative settlement facilitates realisation of regulatory objectives;
• the target is willing to take remedial measures to compensate investors who have suffered losses owing to its suspected violations; and
• settlement will not violate mandatory laws or regulations or jeopardise societal public interests or legitimate rights of others.

Currently, it appears that there is only one case where the target applied to the CSRC for administrative settlement, but that application was rejected.

Compliance programmes

Programme requirements

What requirements exist concerning the nature and content of compliance and supervisory programmes for each type of regulated entity?

The CBRC and the CSRC have formulated rules relating to compliance risk management, which capture most major financial institutions in the financial system.

On 25 October 2006, the CBRC promulgated the Guidelines for Compliance Risk Management of Commercial Banks (Compliance Risk Management Guidelines). The Compliance Risk Management Guidelines apply to financial institutions supervised by the CBRC and generally require a compliance risk management system to consist of:

• compliance policies;
• compliance function and resources dedicated to compliance;
• compliance risk management plans;
• compliance risk identification and management flows; and
• compliance training and education mechanisms.

On 6 June 2017, the CSRC issued the Measures for the Compliance Management of Securities Companies and Securities Investment Fund Management Companies (Securities and Fund Institutions Compliance Management Measures), which is applicable to securities and fund management institutions. The Securities and Fund Institutions Compliance Management Measures provide that:

• securities and fund institutions shall formulate and implement compliance policies and procedures to prevent compliance risks;
• the management of compliance shall be extended to all departments, branches, subsidiaries and all personnel and shall cover all aspects of business operations; and
• a culture of compliance and the compliance awareness of employees must be developed.

Gatekeepers

How important are gatekeepers in the regulatory structure?

According to the Compliance Risk Management Guidelines, the chief compliance officer is responsible for coordinating identification and management of compliance risks, supervising the compliance function and submitting compliance risk assessment reports periodically to senior management. The Compliance Risk Management Guidelines also provide that the internal audit function is responsible for compliance audits of all operational activities and should report on the effectiveness of the compliance management function. Further, the Compliance Risk Management Guidelines requires the board of supervisors to supervise the performance of compliance duties of the directors and senior management.

According to the Securities and Fund Institutions Compliance Management Measures, the chief compliance officer reports to the board of directors. Specifically, the chief compliance officer is responsible for:

• organising formulation and revision of compliance rules and supervising enforcement;
• conducting compliance review of internal rules, major decisions, new products and new business plans and providing compliance review opinions;
• conducting compliance inspections regarding business management and operations of the company;
• providing compliance consulting and training for senior managers and branch offices or subsidiaries;
• supervising the handling of non-compliance complaints and reporting; and
• cooperating with the CSRC and its local counterparts in mandatory reporting and investigations.

The Securities and Fund Institutions Compliance Management Measures do not provide for the role of internal audit in compliance, although most financial institutions have internal audit functions. Additionally, the board of supervisors has the power to supervise the performance of the directors and senior management in connection with compliance and may propose removal of directors or senior managers who are responsible for major compliance risks.

Directors' duties and liability

What are the duties of directors, and what standard of care applies to the boards of directors of financial services firms?

The Company Law provides for the duties of directors applicable to all entities established in accordance with the law. Directors must abide by laws and regulations and the company’s articles of association and act in good faith and be diligent in their roles. Directors’ statutory duties of good faith prohibit them from:

• taking bribes or other illegal gains by abusing their powers or encroaching on the company’s property;
• misappropriating company funds;
• depositing company funds in personal bank accounts or bank accounts of other individuals;
• concluding contracts or transactions with the company in violation of the articles of association of the company, or without the consent of the board of directors or the shareholders;
• competing with the company for business opportunities by taking advantage of his or her powers, or operating any business that competes with the company without the consent of the shareholders;
• accepting commissions for transactions between the company and others; and
• disclosing the company’s secrets without authorisation.

The Company Law does not elaborate on the diligence obligations of directors. According to the Guidelines for the Governance of Listed Companies issued by the CSRC, directors of listed companies must ensure adequate time and effort to perform their obligations, attend meetings of boards of directors diligently, follow their public commitments, participate in training for purposes of understanding their rights and obligations as directors and gather the necessary skills for the performance of their duties. More specifically, the Guidelines for the Articles of Association of Listed Companies provide that the diligence obligations of directors include:

• ensuring that business activities of the company comply with national laws, regulations and policies by exercising powers delegated by the company cautiously, carefully and diligently;
• treating all shareholders equally;
• knowing the situation of the company’s management and operations;
• signing the company’s periodical disclosures and ensuring that the company’s disclosures are true, accurate, and complete; and
• truthfully providing the board of supervisors with relevant information and materials.

The CBRC has issued various rules regarding the duties of directors of financial institutions within their jurisdiction, including without limitation the Interim Measures for Assessment of Performance of Directors of Commercial Banks (2010) and the Guidelines for Corporate Governance of Commercial Banks (2013), which mainly mirror those of the Company Law. In practice, when reviewing whether directors have performed their faithfulness and diligence obligations, Chinese courts do not conduct substantive reviews of the acts of directors, but instead focus on the formal aspects of these acts, namely, whether the acts of the directors violated mandatory laws, regulations or articles of association of the company.

With regard to the standard of care applicable to directors of financial institutions, the Tort Liability Law provides that the party infringing upon civil rights and interests of others by fault shall assume tort liabilities. The Tort Liability Law itself does not further define the term ‘fault’, and no judicial interpretations have been issued. According to Understanding the Tort Liability Law (which, though not binding, provides reference for judicial practice), published by the Legislative Affairs Commission of the National People’s Congress (NPC), ‘default’ can be divided into ‘intentional’ and ‘negligent’, and negligence will be established if the individual or entity:

• has violated mandatory laws and regulations; or
• has failed the standard of care of a reasonable person.

The approach adopted by Chinese courts generally corresponds to that of the Legislative Affairs Commission of the NPC.

When are directors typically held individually accountable for the activities of financial services firms?

According to the Law on Commercial Banks, the Securities Law, the Regulations on Foreign Exchange Control and other relevant rules, when directors are directly responsible for actions that have harmed a company, sanctions may be imposed on such directors. Under the Criminal Law, criminal liabilities may be imposed on persons who are directly responsible for the crime of a company.

Private rights of action

Do private rights of action apply to violations of national financial services authority rules and regulations?

Generally, rules or regulations issued by financial regulators do not afford private rights of action. Individuals or entities who have suffered loss as a result of financial service firms’ violations of financial rules may result in actions based on breach of contract or tort.

Standard of care for customers

What is the standard of care that applies to each type of financial services firm and authorised person when dealing with retail customers?

As discussed in question 15, the Tort Liability Law does not apply a clearly defined standard of care to financial services firms. In terms of judicial practice, Chinese courts have ruled that financial service firms, as professional service providers, have a higher standard of care and must strictly follow laws, regulations and rules applicable to them and internal rules or processes for purposes of implementation of those laws, regulations and rules. Failure to perform their obligations under those laws, regulations, rules or internal rules or processes will constitute a ‘fault’ under the Tort Liability Law.

Does the standard of care differ based on the sophistication of the customer or counterparty?

As discussed in question 15, the Tort Liability Law does not apply a clearly defined standard of care in tort cases. In terms of judicial practice, generally the standard of care does not differ based on the sophistication of the customer or the counterparty, but courts have wide discretion in this regard.

Rule making

How are rules that affect the financial services industry adopted? Is there a consultation process?

Rules that affect the financial services industry are promulgated by different authorities, depending on the level of the relevant law. Such authorities include the National People’s Congress (for basic laws such as Civil Law and Criminal Law), the Standing Committee of the NPC (for laws other than basic laws), the State Council (for regulations), and financial regulators (for departmental rules).

With regard to the legislative process, consultation is generally required for laws, regulations and important departmental rules. The consultation can take the forms of legislative research, comments solicited from specific institutions or individuals, comments solicited from the public, legislative conferences, legislative seminars or legislative hearings.

Cross-border issues

Cross-border regulation

How do national financial services authorities approach cross-border issues?

Chinese financial regulators impose stringent regulation on cross-border financial activities, including foreign investment in the Chinese financial sector, overseas investment by Chinese financial firms, business operations of offshore financial firms within China, and overseas business operation of Chinese financial firms. Generally, these activities require prior approval or recordal with competent financial regulators.

The two major financial regulators, the CBRC and the CSRC, have entered into memoranda with banking and securities regulators of more than 60 countries, mainly for purposes of regulatory cooperation, such as coordination and information exchange in cross-border enforcement actions. With regard to mutual recognition, the CSRC and the Securities and Futures Commission of Hong Kong have entered into a memorandum in connection with mutual recognition of funds in 2015, which allows Mainland and Hong Kong funds that satisfy the eligibility requirements to follow streamlined procedures to obtain authorisation or approval for offering to retail investors in each other’s markets.

International standards

What role does international standard setting play in the rules and standards implemented in your jurisdiction?

China is a member of major international financial organisations, including the International Monetary Fund (IMF), the World Bank, the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors. China has generally followed the standards and guidelines formulated by these organisations. With regard to banking, the CBRC has already issued various rules in 2015 in order to domestically implement the Basel III agreed upon by the members of the Basel Committee on Banking Supervision in 2011. For securities regulation, according to the report People’s Republic of China, Detailed Assessment of Observance, IOSCO Objectives and Principles of Securities Regulation (2017) prepared by the IMF, China has fully or broadly implemented most of the IOSCO Principles of Securities Regulation.