China in major push to regulate online finance

14th October 2016. By Toh Han Shih

As many as 17 Chinese government agencies and ministries are involved in several initiatives to regulate various forms of online finance, including peer-to-peer, or P2P, lending, crowdfunding, online asset management and online payments, Chinese government websites announced today and yesterday.

Today on the website of the People’s Bank of China, or PBOC, the bank’s vice governor, Pan Gongsheng, called for the improvement of legal frameworks for online finance. Laws must be created in areas where there are legal vacuums in order to foster the healthy development of online finance, Pan said. He called for the setting up of a social supervision system to call out illegal behavior in online finance. Pan said common standards should be set for services related to payment and settlement in online finance and called for greater transparency in fund accounts and cross-industry settlements.

In the course of the rapid development of online finance, various risks have accumulated, Pan said. They included gaps in protection against money laundering and terrorist financing, illegal fundraising masquerading as financial innovation, and financial fraud.

Yesterday, the PBOC announced on its website that 17 government departments and ministries had published an initiative on regulating the risks of online asset management and cross-industry online financial businesses. Those government bodies included the PBOC, the National Development and Reform Commission, the Ministry of Public Security, the State Administration for Industry & Commerce, the China Securities Regulatory Commission, the China Banking Regulatory Commission, the China Insurance Regulatory Commission, the Supreme People’s Court and the Supreme People’s Procuratorate.

The initiative aims to regulate three types of businesses: asset management firms that open unregulated online businesses, companies without financial expertise that launch online financial businesses, and conglomerates with multiple forms of expertise in finance that offer a comprehensive set of online financial businesses. For example, financial firms that traditionally sell financial products offline will be banned from using the Internet to sell those products to clients who are not suitable customers, including individuals who have little knowledge of the risks of such products.

In connection with that initiative, the State Council, China’s de facto cabinet, has published a notice on regulating the risks of online finance, the PBOC announced on its website yesterday. The notice aims to regulate various forms of online finance, improve market competition and curb online financial risks, while encouraging financial innovation.

According to the notice, if P2P and crowdfunding platforms have not received authorization, they are not allowed to conduct asset management activities, sell debt or equity, or engage in high-risk financing activities in the securities market. There should be a strict separation between the funds of P2P and crowdfunding platforms and the funds of their clients, with clients’ funds entrusted to third-party institutions such as banks for security.

If property companies, property intermediaries and online financial companies have not acquired the requisite financial expertise, they are not allowed to use P2P and crowdfunding platforms to finance property projects, the notice said. There should be fair competition between online companies and traditional financial firms, with the same supervisory requirements applied to both.

Conglomerates with multiple online businesses should not allow their various businesses to conduct related-party transactions in a manner that violates China’s regulations on related-party transactions, according to the notice. The same principles apply to both online financial companies and traditional financial companies, which are obliged to create firewalls between their various business units to guard against the risks of overlapping businesses.

The notice forbids non-bank online payment companies from helping themselves to the payment reserve funds of their clients. Clients’ payment reserve funds must open accounts with the PBOC or commercial banks. The PBOC and commercial banks are not to pay interest to non-bank online payment companies based on their clients’ payment reserve funds. There should be an incentive system to encourage non-bank online payment companies to provide quick, small loans for the benefit of ordinary people. Non-bank online payment companies are not allowed to conduct payment settlements that cross multiple industries and connect with the systems of multiple banks, but must use the PBOC or other authorized institutions for payment settlements.

There should not be false advertising of online financial services, including unqualified companies advertising themselves as online financial businesses, said the notice.

At a meeting in Jiangxi province on Oct. 12, Cao Jianming, China’s procurator general, whose position is partly similar to that of an attorney general, said curbing online fraud was the solemn duty of the Supreme People’s Procuratorate, which he heads. He called on the procuratorate to work with the public security ministry, Supreme People’s Court and various government departments to strike hard against online fraud.

As of the middle of this this year, China had 2,349 P2P firms that had extended loans totaling 621.26 billion yuan ($92.4 billion), a 49.1 percent increase in the number of firms since the end of 2014 and a 499.7 percent surge in the value of loans, according to official Chinese data. As of the middle of this year, there were 1,700 P2P platforms with problems, accounting for 43.1 percent of the national total, according to preliminary official Chinese data. Some of the problem P2P platforms had extended illegal loans and their management had absconded.

Since last year, the Chinese government has cracked down on abuses in online finance, including P2P lending, and announced new laws to fight online financial crime, as MLex has reported.

	Eliot Gao