On September 13, 2020, the Trial Measures on Regulation of Financial Holding Companies (Order No. 4 [2020] of the People’s Bank of China, hereinafter referred to as the Measures) was officially promulgated. A few days ago, officials of the People’s Bank of China (PBC) answered press questions on the Measures.
I. What is the purpose of formulating the Measures?
In recent years, some large financial institutions have engaged in cross-sector investment and evolved into financial groups, while some non-financial enterprises have held several different types of financial institutions through investment and become de facto financial holding companies (FHCs). Among them, some highly competitive and well-regulated institutions have improved resource allocation, reduced cost as well as enriched and improved their financial services through this business model, which was conducive to meeting the demands of various enterprises and consumers and to boosting the capacity of the financial sector for serving the real economy. However, there were also a few enterprise, which have expanded blindly into the financial sector in the absence of isolation mechanisms, and led to continuous accumulation of risks.
Attaching great importance to the regulation of FHCs, the CPC Central Committee and the State Council have stated clearly that efforts should be made to regulate the comprehensive financial operations as well as the integration of industry and finance, to step up coordinated regulation of FHCs , and to shore up the weak links in the supervisory and regulatory systems. On September 13, 2020, the State Council issued the Decisions on Implementing the Access Management of Financial Holding Companies (Guofa No. 12 [2020], hereinafter referred to as the Decisions), which authorized the PBC to perform market access management of FHCs and to organize the supervision and regulation. The PBC, along with relevant departments, extensively solicited opinions from all parties concerned and then formulated the Measures, which is an important step to implement the decisions and arrangements of the CPC Central Committee and the State Council. The PBC will carry out market access management and sustained regulation of FHCs in accordance with laws and regulations to forestall and defuse systemic risks, and to strengthen the capacity of the financial sector for serving the real economy.
II. What is the reason for launching the market access management of FHCs?
In line with the Decisions and the Measures, the PBC conducts market access management of FHCs for the following reasons. First, FHCs tend to be large in size, with diverse and connected businesses across different institutions, markets, industries and regions, and thus are related to the country’s financial security and public interests. which call for the regulation of their market access. Second, launching explicit administrative permit is an important step in regulating FHCs in accordance with laws. It helps prompt FHCs to operate according to laws and regulations in an all-round manner and forestall risk contagion. Third, aligned with the established practice of major countries and regions, it reflects the regulation philosophy that the financial sector is a franchising industry and market access should be granted according to the law.
III. What’s the application scope of the Measures?
According to the Measures, an FHC should be subject to regulation under the following circumstances: first, its controlling shareholders or actual controllers are domestic non-financial enterprises, natural persons or authorized legal persons; second, it has de facto control of at least two types of financial institutions; third, the total assets of the financial institutions actually controlled by it or the assets entrusted to it for management reach a certain scale, or it is established as required by macroprudential regulation.
For financial groups formed by financial institutions through cross-sector investment as controlling shareholders, the regulation policies and standards should be established with reference to the Measures. Specific rules will be formulated separately.
IV. What are the general principles and supervisory framework of the regulation on FHCs?
In line with the principle of macroprudential management, the Measures regulates the law-based market access of FHCs formed via the investment by non-financial enterprises. The regulation of FHCs should be consistent with that of financial institutions to render all-round, continued and look-through regulation of their capital, market conducts and risks on the basis of consolidated management, regulate business activities, prevent risk contagion and promote the virtuous cycle of the economy and finance.
The Measures makes it clear that the PBC should exercise the regulation of FHCs, while financial regulators should, in accordance with the law and the division of responsibility for financial regulation, regulate corresponding financial institutions controlled by FHCs. The PBC should join hands with relevant authorities to institute an inter-ministerial mechanism for the regulation of FHCs to strengthen supervisory cooperation and information sharing.
V. What are the procedures for establishing an FHC?
Where the conditions for the establishment of an FHC are met and its establishment is proposed, an application should be submitted to the PBC within 12 months after the implementation of the Measures. After the implementation of the Measures, if an FHC intends to have de facto control of two or more financial institutions of different types and the conditions for its establishment are met, an application should be submitted to the PBC as well. Upon approval by the PBC, the FHC should, with a license of FHC issued by the PBC, register with the market regulator with the words “financial holding” in Chinese characters (“金融控股”) included in its name.
VI. How does the Measures regulate the management of the shareholders and capital of FHCs?
First, rules will be set for the qualifications of shareholders in terms of the FHC’s core business, corporate governance, financial conditions, ownership structure, and risk management. Differentiated requirements will be made for the continuous profitability of principal shareholders, controlling shareholders and actual controllers. Second, regulators should adopt the “look-through” approach to oversee the source of investment funds, which must be legal and meet relevant regulations. Third, a negative list will be made, stipulating the conducts that controlling shareholders of FHCs are prohibited from. Fourth, a regulatory mechanism for capital adequacy will be established. The capital of an FHC should be compatible with its asset size and risk exposure.
VII. What are the requirements for the ownership structure of FHCs?
First, the ownership structure of an FHC should be simple, clear, and transparent. Reasonable corporate levels which are compatible with its own capital scale, business operation and risk management should be set up. Reverse-shareholding or cross-shareholding within an FHC are prohibited. Second, a financial institution controlled by an FHC should not be the principal shareholder of other types of financial institutions, except when it controls financial institutions of the same type as its own, or the controlling of financial institutions is considered as its business extension as approved by financial regulators. Third, corporate groups with unqualified ownership structure established before the Measures takes effect should streamline their organizational structure and simplify the number of their corporate levels within the transitional period as approved by the financial regulators.
VIII. What are the requirements for the corporate governance and risk management of FHCs?
First, FHCs should improve their corporate governance structures, participate in the corporate governance of the institutions they control according to the law, and should not interfere in the independent management of such institutions. The appointment of board directors, supervisors, and senior executives of an FHC should be filed for record. Second, the FHC should establish a sound all-encompassing risk management system on the basis of consolidated financial statements, covering all institutions it controls and all types of risks. Third, a risk isolation mechanism within the company group should be established and improved, and well-regulated synergy should be brought into play with priority given to the protection of customer information. Fourth, the management of related-party transactions should be enhanced. Related-party transactions within the group should be legal and in line with market principles.
IX. Why is the penalty amount raised in the Measures?
According to relevant rules in the Law of the People’s Republic of China on Administrative Penalty and the Circular of the State Council on Implementing the Law of the People’s Republic of China on Administrative Penalty (Guofa No.13 [1996]), as approved by the State Council, the Measures has increased the penalty amount for violations. This would help FHCs and relevant personnel to develop an awareness of running companies legally and conducting business activities in a law-based manner, create a fair-competition environment, maintain financial stability, and protect public interests.
X. How will the Measures affect the financial market?
Generally speaking, the Measures will have positive effects on financial institutions, non-financial enterprises, and the financial market. With a clear ownership structure and a well-established risk isolation mechanism, FHCs, as the controlling shareholders of financial institutions, would help integrate financial resources, improve the soundness of business operations, and enhance their competitive edges. In the long run, the introduction of the Measures will facilitate the orderly competition among and sound development of various types of institutions, and help prevent systemic financial risks.
XI. What is the arrangement for the transition period?
Institutions that meet the aforesaid conditions and are scheduled to set up FHCs should apply to the PBC within 12 months after the Measures takes effect, and then proceed with their plans once approved. Those that fail to meet regulatory requirements in ownership structure or other areas should make rectification plans based on their own circumstances. The PBC will set a reasonable transition period, keep an opportune moment and pace, and instruct existing companies to make orderly adjustments at, so as to facilitate the smooth implementation of the Measures.
XII. How was the solicitation and adoption of public opinions?
From July 26 to August 24, 2019, we sought public opinions on the Measures through websites of the Legal Information of the Chinese Government (chinalaw.gov.cn) and the PBC, and received 594 comments. Most have been adopted after a thorough study on these comments one by one, including setting differentiated requirements for the shareholders of FHCs, extending the time limit on the application for setting up an FHC, easing requirements on the number of corporate levels, canceling some qualifications for new FHCs to become shareholders of financial institutions, and raising the penalty amount for violations. Some comments on relaxing certain regulatory requirements were not adopted. Regarding the suggestion that relevant articles need to be further specified, the PBC will formulate supporting regulations to continuously improve the regulatory framework for FHCs.