2023 REGULATORY MAINLINE REVIEW
1. Strengthening support for national economy and unifying behavioral and functional regulations
The Central Financial Work Conference held at the end of October noted that finance is "the bloodline of the national economy" and proposed for the first time the goal of "accelerating the construction of the country to a financial powerhouse". In order to realize this goal, regulators in the banking sector have continued strengthening the support for the national economy, especially from the perspective of real economy and financial inclusion2. A number of policies were introduced to facilitate the financial inclusion for micro and small-sized enterprises, including the Notice on Increasing Efforts to Improve the Quality of Financial Services for Micro and Small-sized Enterprises issued by the General Office of the CBIRC in April, the Opinions on Promoting the High-Quality Development of Inclusive Finance issued by the State Council in October, and the Notice on Increasing Financial Support for the Development of the Private Sector jointly issued by the PBOC, the NFRA, and eight other departments of the State Council in December. There were also initiatives to encourage financial support for transportation, logistics, housing and expense reduction, among others.
It can be seen from the relevant policies that, on the basis of institutional regulation, the regulators are also enforcing both behavioral regulation and functional regulations. In this round of institutional reform by the State Council, the NFRA was formed on the basis of the CBIRC, and its internal departments were adjusted to adapt to the current landscape of banking industry. A number of new departments were set up in NFRA, including the Technology Supervision Department, the Asset and Wealth Management Institution Supervision Department, and the Financial Institution Authorization Department. The Joint Stock Bank Supervision Department and City Commercial Bank Supervision Department were merged into one. The aim was to bring about unified supervision of similar activities and functions.
2. The banking sector continues to open up with more and diverse opportunities for foreign institutions
The banking sector continued to open up in 2023. A number of regulations were introduced to lay the foundation for more types of foreign institutions to penetrate more deeply into the domestic market. For example, the New NBFI Rules facilitate the investment of foreign investors in non-bank financial institutions, allowing foreign non-financial institutions to invest in financial asset management companies, permitting multinational groups to directly establish finance companies, and lowering the asset qualifications for foreign investors. The New AFC Rules broaden the scope of deposit-taking by auto finance companies ("AFCs") and changes the currency in which AFCs can conduct business from "RMB" to "local and foreign currencies", making it easier to access foreign funds and run cross-border business by AFCs.
At the same time, the development of mutual market accesses has been in full swing, with the turnover exceeding RMB1.8 billion in just half an hour after the launch of the Northbound Swap Connect (a new channel for mutual market access between Hong Kong and the Chinese Mainland, allowing international investors to trade without changing their existing trading and settlement practices). Another significant change was the "Cross-border Wealth Management Connect", launched in the Greater Bay Area, which released the Detailed Rules for the Implementation of the Pilot Program of Cross-Border Wealth Management Connect in the Guangdong-Hong Kong-Macao Greater Bay Area (Consultation Paper) after two years of its pilot. Among other rules covered in this arrangement was the upgrade of the qualification requirements for investors, the scope of participating institutions, the scope of qualified investment products, and the quota for individual investors and other aspects. This aims to further promote the mutual market access schemes in the Greater Bay Area.
Also noteworthy, at the end of 2023, the PBOC issued a series of policies to promote the facilitation of cross-border trade and investment. In the middle of the year, the pilot program to allow multinational companies to integrate the use of Chinese and foreign currencies within the group (called "cash-pooling") extended to cover more regions, ushering in greater use of RMB for cross-border trade and investment and creating a more favorable business environment for multinational companies.
Concurrently, a number of foreign investors were granted regulatory approval to participate more extensively in domestic financial business in various segments of the banking sector in mid-2023. In November 2023, China gave the green light to business opening of the second Sino-foreign joint venture ("JV"), Wanshi Wanglian Information Technology (Beijing) Co., Ltd. (万事网联信息技术（北京）有限公司), for bank card clearing operations. This JV is controlled by the second largest U.S. card clearing institution, MasterCard. Immediately thereafter, the PBOC approved the third capital increase of China's first Sino-foreign JV, Express (Hangzhou) Technology Service Company Limited (连通（杭州）技术服务有限公司), for bank card clearing operations, making American Express the controlling shareholder. In December 2023, approval was given to DBS Bank (the largest shareholder already) to increase its stake in Shenzhen Rural Commercial Bank (深圳农村商业银行) again. In addition, four foreign-invested banks were included in the digital RMB pilot for the first time in 2023, namely HSBC, Hang Seng, Standard Chartered and Fubon China. A number of other foreign-invested banks are also actively pursuing their corporate digital RMB business. For example, in July 2023, DBS China with the cooperation of China UMS (银联商务) completed the first payment collection transaction of its corporate digital RMB collection business. With the Central Financial Work Conference sending an important signal that the financial industry is striving to promote high-level opening up, the banking industry will also steadily expand its opening-up and cooperation with foreign investors and market players.
3. Focus on the management of NBFIs to improve their operations
In recent years, a number of the regulator's annual legislative work plans have frequently mentioned revisions and enactments of regulations of non-banking financial institutions ("NBFIs") and a number of important provisions were finally implemented in 2023. The New NBFI Administration Rules came into effect in November, and regulatory rules for AFCs and consumer finance companies ("CFCs") were revised for the first time in more than a decade. In addition to the measures to promote opening-up mentioned above, there were also measures to improve regulation on shareholders and business, all leading to greater controls of NBFIs.
On the one hand, regulatory requirements such as equity management requirements of the NBFIs have been gradually unified. For example, the Measures for the Administration of Finance Companies of Enterprise Groups, the New AFC Rules and the New NBFI Administration Rules imposed prohibitive or restrictive requirements on the pledge of equity interests by major shareholders of most types of the NBFIs.
On the other hand, the criteria for the scope of financial leasing business of different institutions have been unified. Previously, though AFCs as well as nationwide financial leasing companies (in Chinese:金融租赁公司) supervised by NAFR and local leasing companies for financing purpose (in Chinese:融资租赁公司) supervised by local government all could engage in financial leasing business, unlike the other two types of institutions, AFCs specifically could not conduct sale and leaseback business. The New AFC Rules, while liberalizing the sale-leaseback mode, brings together the business under one regulatory roof.
Also at the end of 2023 the CFC Consultation Paper and at the beginning of 2024 the Measures of the Administration for Financial Leasing Companies (Consultation Paper) were both published for public comment. The Measures for the Pilot Administration of Currency Brokerage Companies were also included in the CBIRC's (currently NAFR) 2023 annual legislative work plan. All of which is to note that there is more institutionalized regulation of NBFIs, and we can expect more of the same for other relevant types of NBFIs in the coming year.
4. Risk management rules upgraded, with greater focus on data and cybersecurity
There were a series of revisions to the risk management rules of the banking sector in 2023. In February, on the basis of the existing rules, the CBIRC and the PBOC issued the Measures for the Risk Classification of Financial Assets of Commercial Banks, which further clarified the scope of the risk classification of financial assets and refined some of the classification standards. In November, the NFRA issued the New Capital Rules, which improved the rules on the capital supervision of commercial banks, urging banks to strengthen the level of risk management.
At the same time, a series of risk management rules in the banking sector have also been revised. These changes are not only China's positive response to the latest status of international regulatory reform represented by Basel III, but also the latest guideline on bank risk management by regulators synthesizing international experience and China's practice. These changes have had a significant impact. On the one hand, the New Capital Rules added specific requirements in relation to monitoring scope and the data to make them better reflect the actual risk level of institutions more accurately, such as including all financial assets bearing credit risk in the scope of risk classification management, expanding the scope of loan commitments that should be accounted to the risk capital of institutions, and including all off-balance sheet businesses in the monitoring scope. On the other hand, the New Capital Rules have imposed differentiated – and more reasonable - regulatory requirements: for example, the New Capital Rules have built a differentiated capital regulatory system, encouraging banks with different scales and types of business to adopt different risk management approaches, and set preferential weights for high-quality clients and micro, small and medium-sized clients, and set preferential weights of qualified traders for high-quality credit card customers, which reflected the policy support for financial inclusion. After such series of revisions, the risk management system of the banking sector has become increasingly complete and comprehensive, but it also adds new requirements on data reporting for relevant institutions.
Regulators have also focused on risk management as applied to information networks and data in 2023. Following the issuance of the Measures for the Regulation of Risks in the Information Technology Outsourcing by Banking and Insurance Institutions in 2021, in response to several security risk incidents involving outsourcing service providers of financial institutions, the NFRA issued the Notice on Strengthening the Management of Cyber and Data Security in Third-Party Collaboration, which requires financial institutions to carry out a self-check to identify the risks in all their arrangements with digital service providers and to strengthen the coordinated management of technology risks, especially for monitoring the off-site outsourcing risk and supervision reports. The PBOC has also issued the Administrative Measures for Data Security in Business Supervised by the People's Bank of China (Consultation Paper), which intends to strengthen the data security management in various aspects of business, such as data categorization and grading, general requirements, management measures, technological measures, risk monitoring, assessment and auditing, and incident handling measures. All in all, there have been more specific rules introduced that have a bearing on data and cyber security in the banking sector, intended to deal with potential risk.
Overall, risk management in the banking sector has been comprehensively updated, adopting a prudent attitude towards emerging areas as well as a more refined and contextualized approach, with a view to accurately controlling risks.
5. Preventing financial risks remains a long-term task, with a special focus on diversified reform of small and medium-sized banking financial institutions upgrading their risk management systems
In recent years, there has been many merger and reorganization of small and medium-sized banks, including the reorganization of urban commercial banks such as Xinjiang Bank(新疆银行), Shanxi Bank(山西银行), Liaoshen Bank(辽沈银行) and Zhongyuan Bank (中原银行). The process of small and medium-sized banks resolving risks through reforms has accelerated significantly in 2023. During the year, a number of village banks were merged and converted into subordinate branches of other commercial banks, 10 village banks were dissolved, rural credit cooperatives ushered in a wave of reformation and merger, a number of rural commercial banks were absorbed and merged, and more than a hundred small and medium-sized banks had changes made to their equity structure. Risks were mitigated by acquirers taking the initiative to integrate advantageous resources, expand the assets size and the business operations scope, strengthen the ability to continue to operate in a compliant manner, enhance the regional brand influence, reduce the regional homogenization of competition, etc.
The risk resolution of small and medium-sized banking financial institutions has continued to adhere to the category-specific approach, and have developed and implemented various programs based on the specific conditions of each province and bank/company. For village banks and rural commercial banks, which are the key focus of regulators, there were those dissolved by absorption and merger by large banks, including: Huaxia Bank(华夏银行)'s acquisition of Beijing Daxing Huaxia Village Bank(北京大兴华夏村镇银行), Harbin Bank(哈尔滨银行)'s merger of Yanshou Rongxing Village Bank(延寿融兴村镇银行) and Bayan Rongxing Village Bank(巴彦融兴村镇银行); and there have also been absorptions and mergers among village banks and rural commercial banks, such as absorption and merger of (i) Gaocheng Hengsheng Village Bank(藁城恒升村镇银行) and Jinzhou Hengsheng Village Bank(晋州恒升村镇银行) by Shijiazhuang Xinhua Hengsheng Villagel Bank(石家庄新华恒升村镇银行) and (ii) Sichuan Guanghan Rural Commercial Bank(四川广汉农商银行), Sichuan Shifang Rural Commercial Bank(四川什邡农商银行), Sichuan Mianzhu Rural Commercial Bank(四川绵竹农商银行) and Sichuan Zhongjiang Rural Commercial Bank(四川中江农商银行) by Deyang Rural Commercial Bank(德阳农商银行). In addition, there are consolidations and mergers. Aksu Tarim Rural Commercial Bank(阿克苏塔里木农商银行) was established by the merger and acquisitions of five rural commercial banks and three rural credit cooperatives in the Aksu region.
Besides that, significantly broadening the capital replenishment channels for small and medium-sized banks is also an important tool for reform and risk mitigation. As an exogenous capital replenishment tool, the pace of the issuance of special bonds by local government for small and medium-sized banks in 2023 has significantly accelerated.
6. Regulation undergoes digital transformation to improve management quality and efficiency
Alongside the digitalization of the financial sector, regulators have increasingly used digitalization as a way to be more efficient in how they regulate the sector. This is what is called "regulatory digitalization". Following the PBOC's proposal in 2022 to "accelerate the all-round application of regulatory technology and strengthen the construction of digital regulatory capacity", the CBIRC proposed to enhance the level of regulatory digitization and intelligence in its 2023 working conference, making regulatory digitization an inevitable trend. . In 2023, the NFRA issued the Notice on the EAST Data Quality "Enhancement Project", and also issued special notices for local small and medium-sized banks and finance companies of enterprise groups. This was the first time that the NFRA has carried out such an enhancement project, following a series of efforts over the past few years. In addition, the Measure for the Administration of Banking and Insurance Regulatory Statistics implemented in February 2023 also requires the establishment of an information system to make sure that businesses have the necessary statistics for regulatory purposes and improve the level of digitalization. It is evident that regulators are focusing on improving the quality of regulatory statistics and technical support to drive the quality and effectiveness of banking regulation and governance to a higher level.
In addition, regulatory digitalization also improves administration and better serves the market. In March, the Ministry of Natural Resources, together with the CBIRC, issued the Notice on Collaboration in the Service of "Transfer of Ownership of a Mortgaged Property" for Bringing Convenience to the People and Benefiting Enterprises to implement the "transfer of ownership of a mortgaged property" which was explicitly stipulated in the PRC Civil Code. This involved online and efficient handling of the "transfer of ownership of a mortgaged property" through the "headquarter-to-headquarter" connection of business and system among administrative institutions, direct connection of the system or "real estate registration via internet", comprehensive application of electronic real estate registration certificates and other means, all with the goal of making real estate mortgages easier to secure. In addition, the Notice on Improving the Level of Digital Services of Banks in Handling Capital Account Business promoted the digital services of capital account business nationwide on the basis of the previous pilot project, which explicitly supported banks to handle the capital account business by means of reviewing the electronic documents and included the foreign exchange and cross-border RMB business of capital account that banks have the authorization to handle directly offline in the scope of the digital services, which also greatly improved the efficiency of handling foreign exchange business of banks. It is evident that regulatory digitization also plays an important role in improving the efficiency of specific business.
7. Financial support for technology companies becoming increasingly critical, leading to some innovative approaches
In terms of strengthening financial support for technology, the banking industry has made a number of useful attempts in 2023. Despite the gap between credit assessment and business logic of traditional financing and the "three highs and one light" (i.e. high-tech, high-risk, high-growth and light-asset) characteristics of tech companies, the market was still full of innovative approaches to bridge the gap. For example, in March, China Everbright Bank provided a RMB10 million loan to Shenzhen Weiyan Technology Co., Ltd (深圳微言科技有限责任公司), which is the first unpledged loan with credit enhancement of data asset in China. In December, the Shenzhen branch of the PBOC led a number of banks to participate in its pioneering "Takeoff Loan" (腾飞贷) to support tech companies through a unique product design that is different from the traditional way.
Practical innovations in systems and mechanics are also worthy of attention. First of all, in response to the difficulty in valuing intellectual property financing, the China National Intellectual Property Administration (CNIPA), the PBOC and the NFRA have jointly formulated the Patent Evaluation Guidelines, which provide guidance on the evaluation of patent pledges (such as the matters that should be paid attention to in constructing the value analysis and evaluation index system). In August, they also provided guidance to the China Construction Bank to carry out an internal pilot project and assessed the Guidelines' practical effects. Previously, there were only few rules or guidelines issued by the CNIPA or industry associations, basic rules were formulated at an early stage and there was little participation by financial regulators. With the rapid growth of IP-related financing, if the Guidelines can serve as a bridge between the financing sector and the patent valuation sector, it will not only facilitate the support of the financial sector for tech companies, but also generate more business opportunities for banking institutions.
Secondly, when it comes to making it easier for tech companies to secure finance, in addition to the convenience mechanics introduced by the new revision of the loan supervision rules, the National Development and Reform Commission initiated a pilot cooperation mechanic of "linking" investment and loan provision with a number of banks, i.e., financing support to companies through the combination of equity investment and loan provision This mechanic aims to achieve interconnection and sharing via the investment online platform and the credit system of the banks and enhance the financing support of banks to companies through the way of combining equity investment and loan provision.. Shenzhen also issued the Guidelines on Promoting the Construction of Science and Technology Sub-branches of Banking Financial Institutions in Shenzhen, encouraging banking institutions to set up science and technology sub-branches specializing in technology finance, and appropriately decentralizing the business authorization of credit approval, interest rate pricing, etc., and giving internal policy support in credit resources and performance evaluation, in order to encourage banks to provide credit to tech companies. These steps reflect the determination of authorities to make significant efforts in the area of "technology finance". Whether or not these steps can effectively solve the problem of financing difficulties of tech companies remains to be seen.
8. Strong supervision remains a key feature, and importance of "double penalties"
Overall, in 2023 the approach of "strict supervision and strong punishment" has continued. The overall number of fines and the total amount of fines increased compared to 2022, with over-ten-million-yuan fines occurring more frequently and a number of over-billion-yuan fines appearing. Among them, a Chinese bank was fined more than RMB200 million, and there were cases of a foreign-invested bank being fined nearly RMB50 million. Administrative penalties have focused on credit businesses (e.g., flow of credit funds), corporate governance (e.g., related party transactions, equity management) and internal control compliance (e.g., employee behavior management). In addition, since regulators issued the first batch of fines for wealth management companies in 2022, with the end of the transition period of the Measures for the Administration of the Internal Control of Wealth Management Companies in February 2023, five more wealth management subsidiaries were penalized in 2023, with the fines amounting to RMB28.75 million in total. The penalties are mainly related to non-compliance with the proportion requirement for assets invested by wealth management products and failure to disclose the requisite information. Fines have also been imposed on those failing to conduct proper risk management of the underlying asset.
Regulators continue to promote the "dual penalty system" to punish both institutions and personnel. The number of fines with penalties involving individuals is on the rise compared with 2022. For every fine imposed on institutions issued by the regulator, there is a probability of more than 70% involving individuals. Penalties for individuals were still mostly warnings and fines, but more than a hundred people have been prohibited from practicing or managing in the banking sector, including those at the level of president, vice-president or other senior management roles. Some people have been banned for life from engaging in the banking sector for life. At the end of 2023, a number of payment institutions were penalized. For example, one payment institution received a fine with an amount of nearly RMB90 million, with those deemed responsible for illegal decisions being subjected to punishments, including the general manager, vice president, etc.. With the Regulation on the Supervision and Administration of Non-Banking Payment Institutions officially due to be implemented in May 2024, we can expect even greater supervision of payment institutions.
2024 REGULATORY OUTLOOK
1. Access threshold for institutions to be raised and financial regulation with "teeth and thorns" to continue
In 2023, the NFRA finalized the Three Determination Plan, adding the Financial Institution Authorization Department, the Investigation Bureau, and the Administrative Penalty Bureau to its internal structure. Setting up the Financial Institution Authorization Department separately means that the standards and requirements covering access of institutions and personnel will be more uniform and stricter in the future, including access management of institutions and their licensed business scope, as well as the qualifications of director and senior management personnel. The Investigation Bureau will be responsible for the investigation of illegal financial activities, and the new Administrative Penalty Bureau will realize the "separation of investigation and punishment" in terms of supervisory structure, which will implement the "teeth and thorns" of financial supervision. The year 2024 is expected to see an increase in both the number of cases that are investigated and punishment of violations and the number of severe punishment cases. The collaboration with the Ministry of Public Security and the Supreme People's Procuratorate in handling cases will also be strengthened. Meanwhile, the Implementation Measures of Discretionary Administrative Penalties is expected to be formally introduced in 2024, the standards for penalizing violations of laws and regulations in the banking sector will be unified, and administrative penalties will be further strengthened.
2. The "Unified Consumer Protection" system to be accelerated and sales and marketing rules to be optimized
In the 2023 institutional reform, the NFRA was established on the basis of the CBIRC, and the NFRA is responsible for consumer protection in the financial sector. Li Yunze, the president of NFRA, said that the next step of consumer protection work includes: accelerating the set-up of "unified consumer protection", focusing on management of consumer appropriateness by clearing distribution channels and implementing graded processing, as well as resolving outstanding issues by addressing both the symptoms and root causes. At the same time, the "three appropriateness" requirements for financial products, sales channels, and the target clients have also been put forward. It is expected that regulators will formulate separate rules relating to consumer appropriateness for banking institutions, marketing regulation (including online business), and information disclosure to customers. In addition, given that the recent revised rules for specific types of institutions (e.g., the New AFC Rules, the CFC Consultation Paper, etc.) have added a special chapter on consumer protection, the regulation of consumer protection for related institutions will also be strengthened in practice. Added to this, we can also expect more regulatory focus on credit card complaints, early repayment of personal housing loans and other issues that have given rise to frequent complaints by consumers.
3. Policy guidance for banks in different sectors according to their size
Given that the Central Financial Work Conference has clearly put forward to improve the positioning of institutions, support the development of large state-owned financial institutions to serve as the main force for serving the real economy and the ballast stone for maintaining financial stability, and impose strict access standards and regulatory requirements on small and medium-sized financial institutions to carry out a more focused operation on the basis of local areas. In the future, banking institutions may develop in different types and directions according to the principle of "sticking to the position and returning to the origin". It is expected that in 2024 regulators will introduce more policies to encourage large banks to actively invest in real estate bailouts and other areas, and relevant rules and window guidance may be launched simultaneously. Large banks will also be actively engaged in making significant efforts in areas of "technology finance, green finance, inclusive finance, pension finance and digital finance", in particular, to increase their credit investment in related areas, for which the PBOC may launch preferential policies. As for small and medium-sized banks, on the one hand, they will continue to implement the requirements for risk resolution. On the other hand, institutions with good operations will adopt a development strategy different from the previous nation-wide expansion, mainly focusing on local services, micro and small-sized enterprises, inclusive finance, and increasing the credit granting for rural revitalization.
4. Campaign of anti-money laundering ("AML") drawing to a close, and AML law amendments expected to be introduced
The year 2024 is the final year of the three-year action plan (2022-2024) to combat money laundering and illegal crimes. China is also expected to undergo the fifth round of mutual evaluation by the Financial Action Task Force (FATF), and the regulation of AML and counter-terrorism financing may be accelerated in terms of legislation, judiciary and financial supervision. It is expected that "strict regulation and strong punishment" will still be the main thrust of promoting AML work in 2024. More progress is expected in such aspects as revision of the Anti-Money Laundering Law and the applicable judicial interpretations, improvement of AML data statistical capture and data information sharing. The Anti-Money Laundering Law (Consultation Paper) and the Interim Measures for the Management of Information on Beneficial Owner of Market Entity (Consultation Paper), which were issued in 2021, are expected to be formally introduced in 2024. These measures are likely to cover non-financial institutions in AML regulation, address the beneficial owner rules, and prevent the laundering of virtual assets. In addition, a number of other regulatory measures on AML are also expected to be introduced.
5. Financial supervision should achieve full national coverage and local financial institutions will be subject to greater supervision
With the implementation of the NFRA's Three Determination Plan, the scope of regulation of local financial organizations should eliminate regulatory gaps. The plan makes it clear that local financial organizations (which are mainly under the supervision of local government) such as microcredit companies, financing guarantee companies, pawn shops, unregulated financial leasing companies, commercial factoring companies, and local asset management companies shall be brought under the supervision and administration of the Bureau for Combating Illegal Financial Activities. The regulators deal with both "violation with a license" and "violation without a license". In addition to formulating a regulatory system for applicable local financial organizations, the Bureau for Combating Illegal Financial Activities will also collaborate with local financial regulators, and it is expected that the crackdown on illegal financial activities of local financial organizations will be strengthened.
Now that the Three Determination Plan had been finalized, this may accelerate the official release of the Regulation on Local Financial Supervision and Administration. The Regulation on Local Financial Supervision and Administration (Consultation Paper), which was included in the State Council's 2023 legislative work plan. Once formally released and put into effect, there should be national-level legislative supervision of local financial organizations (including emphasis of licensed operation and no cross-provincial business, clarification of the positioning of local financial organizations and the acceleration of the cleanup of non-compliance) with the intended consequence of sustainable development of local financial organizations.
Footnotes
1. Notice on the Issuance of Provisions on the Functions, Structure, and Staffing of the National Administration of Financial Regulation.
2. Inclusive finance or financial inclusion refers to the provision of appropriate and effective financial services to all social strata and groups with financial service needs at affordable costs based on the requirement of equal opportunity and the principle of sustainable business.
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