On 13 October 2016, the State Council released to the public the Plan to Implement Special Rectification Work on Internet Finance Risks, which was circulated internally on 12 April 2016.
The plan follows the Guiding Opinions on Promoting the Healthy Development of Internet Finance 2015, issued by the State Council in July 2015, and seeks to standardise the regulation and supervision of the online finance sector by balancing the often competing goals of protecting consumers and encouraging financial innovation.
Specifically, the plan addresses the following regulatory issues:
- Online peer-to-peer (“P2P”) lending and crowdfunding. The plan prohibits P2P and crowdfunding platforms from various activities including engaging in a range of illegal fundraising activities, selling debt or equity, marketing high-risk securities, making false and misleading claims, and (unless they are qualified and licensed) providing asset management services. The plan also requires these platforms to segregate client funds in third party depository institutions.
- Real estate developers and brokers. The plan prohibits these entities from engaging in online fundraising activities unless they are qualified and licensed.
- Third party payment service providers. The plan calls for the development of common standards for payment and settlement activities in the online finance sector and prohibits non-bank online payment companies from conducting payment settlement across multiple industries and banks. Instead, they are required to use the People's Bank of China (“PBOC”) or other authorised commercial bank to settle payments.
- Group companies. The plan prohibits conglomerates that offer a range of online financial services from violating rules on related party transactions and requires them to establish internal firewalls in a manner similar to traditional financial businesses.
Harvey Lau, Partner, Baker & McKenzie, Shanghai
"The new plan is aimed at eliminating fraud and reducing risks to participants in the internet finance sector. It pinpoints the activities that have given rise to the highest financial risks and sets out boundaries that participants must not cross. It also calls for inter-departmental cooperation involving not only the major financial regulators, but other government authorities, such as the State Administration for Industry and Commerce and the Ministry of Housing and Urban-Rural Development. We see the plan as evidence of the government’s commitment to encourage financial innovation, by putting things back on track, rather than putting a brake on the development of the sector."
The plan does not create specific action items for traditional financial institutions. General Counsel for companies engaged in those business activities specifically addressed by the plan should review their operations to ensure full compliance with the current rules. Counsel for all participants in the internet finance sector should watch for new implementing legislation in the near future.