China: Securing China’s banking IT – CBRC makes life much tougher for MNC vendors

Last Updated: 13 February 2015
Article by Mark Schaub

The CBRC has issued on 20 January 2015 The Notice on the Promotion Guidelines for banking applications of secure and controllable information technology (2014-2015) ("CBRC Guidelines"). The CBRC Guidelines has immediately set off a panic amongst financial institutions operating in PRC and software/hardware/service vendors. The CBRC Guidelines require banks to use "secure and controllable" IT, but many foreign invested financial institutions and vendors are concerned that the guidelines are a large incremental step in an on-going trend aimed at their exclusion from the Chinese market.

The Slow March

The invasive behavior of by PRC authorities in relation to financial institution IT systems started with the issuance by CBRC on 3 March 2009 the Guidelines for commercial banks on management of information technology. These regulations were very general in nature but on reflection they did hint at what was yet to come.

The main intention of these guidelines was to place primary responsibility for the risk management of their institutions IT upon the legal representatives. In addition the guidelines required financial institutions to establish or designate specialized departments responsible for IT risk management and have such department directly report to the CIO or chief risk officer/risk management committee.

The matter seemed to be dormant for a period of time but received new impetus when in February 2014 the central government's internet security and information team was established as a super state organ. This new body was established at the instigation of President Xi Jinping as part of a National Information Security Campaign and accordingly this new policy is made with the very highest of authority.

A key rationale for the IT regulations is to improve information security in the banking sector. At least in part it seems that establishing the CBRC Guidelines was trigged by Edward Snowden's disclosure of Project PRISM. PRISM made the PRC government painfully aware that PRC financial institutions' information could be compromised due to their heavy reliance on MNC vendors. Therefore, it seems that in large part the initiatives are due to national security concerns and accordingly implementation may also depend on events occurring outside the legal framework.

In early September 2014, the CBRC issued the Guidance Opinion on the Strengthening of banking industry's internet security and information construction by secure and controllable information technology ("Guidance Opinion").

The main thrust of this Guidance Opinion is that secure and controllable information technology shall be included as issues to be considered into strategic plan and also set a goal that by 2019 the usage rate of secure and controllable information technology will need to reach 75%. However, these regulations were also still relatively vague.

The key words in the Guidance Opinion were "secure" and "controllable".

It is understood that the reference to "secure" does not necessarily mean the PRC government will force the IT departments of financial institutions to purely rely upon domestic PRC technology or vendors but that vendors will be required to cooperate on key technology and also avoid financial institutions being overly reliant upon products/technology with only one vendor. However, in reality it seems likely that at least to some degree the PRC government was also motivated by a desire to develop the PRC domestic IT industry.

The term "controllable" seems to refer to financial institutions being able to have a level of control over not only the overarching IT framework but also constituent parts such as a single product, technology or vendor in respect of "key information" and "internet infrastructure facilities" including core technology.

The Guidance Opinion also sought to nurture independent innovation and IP protection and required financial institutions to assign at least 5% of their information budget annually for research on secure and controllable systems.

CBRC Guidelines – The Bedevilment is in the Detail

The CBRC Guidelines is largely a follow-up document to the Guidance Opinion and continues to illustrate the PRC government's twin desires to ensure its banking industry is not totally dependent upon foreign IT technology/vendors and secondly that such IT technology can be controlled in order to manage risk.

Although the CBRC Guidelines are not law it is clear that these guidelines cannot be ignored by financial institutions or vendors. The CBRC has established a separate IT department to directly supervise the implementation of the IT regulations and manage "outsourced risk" and there are reports CBRC has audited the IT capabilities of several banks. Also as the CBRC Guidelines foresee the establishment by financial institutions of lead teams to promote secure and controllable IT it is difficult to see how financial institutions in the PRC will be able to turn a blind eye to the new regulations.

The main reason that the CBRC Guidelines are likely to cause far more concern than the previous regulations is due to their specific nature. The main issues are:

  • Provision of Source Code – there CBRC Guidelines provide in its annex requirements for certain hardware and software to have its source code submitted to the CBRC IT department for the record. This will naturally be a source of concern for vendors. Vendors will have IP concerns, privacy concerns, political risk concerns and potentially even US export restrictions to contend with.
  • Controllable Systems Needed – the systems will need to be controllable and this will in reality equate to localization. It is likely that much will be done by financial institutions themselves but also PRC domestic companies will likely step in, either alone as partners with foreign MNCs.
  • IP – the CBRC Guidelines stress the importance of financial institutions patenting improvements and technology, require IP to be registered in China but also require vendors to establish R&D centres in China and obtain permits for technicians to enable monitoring by Chinese authorities.
  • Lots of Deadlines – Financial institutions will be required to submit a plan (i.e. lead team, IT, strategic plan, overall planning, annual work plan) with its official seal to local CBRC by March 15, 2015. Based on media reports it seems that some banks have already submitted plans to their local CBRC. In addition the CBRC Guidelines also set fixed targets.

What has happened since the National Information Security Campaign commenced?

A number of PRC IT companies have seen the opportunity raised by these new requirements and have started to offer solutions to PRC financial institutions. Also it appears that major MNC IT vendors for financial institutions have received significantly less orders from PRC Banks and financial institutions in 2014. It seems companies which provide open source solutions (such as Alibaba) and PRC domestic low-end IT products producer (such as Huawei) will move into the space ceded by IBM and other MNCs.

One major issue that will cut across this will be that the market will need to move towards mobile internet and cloud, which means foreign invested companies will need to obtain value-added telecom service licenses to provide such services. Most of the relevant licenses, such as IDC license are not presently being issued to foreign investors. We expect that MNCs may need to partner with local Chinese companies to continue to provide services.

Our Takeaway

Banks and financial institutions operating in the PRC will have little option but to comply with the reporting requirements and will likely take a "wait and see approach". They will no doubt have their issues with suppliers and integration with current systems but in the end they will need to do CBRC's bidding.

However, MNC software/hardware/service vendors will not be able to have the comfort of such a fatalistic approach. Indeed it will be very difficult for a MNC vendor to have much comfort at all from reading the CBRC Guidelines.

Vendors will have multiple concerns including loss of competitiveness in the PRC marketplace (a large and ever growing market), erosion of their IP, forced marriages with PRC partners and perhaps the greatest concern of all – that the regulations in the banking IT sector only represent a thin edge of the wedge. The greater concern is that such a policy may be rolled out to other sectors such as insurance, ecommerce, automotive etc.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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