China Sets the Rules for Internet Finance
Internet finance in China is growing rapidly and has the potential to significantly alter the structure of the financial system. New firms, many of which are private, are entering China’s mostly state-controlled financial system and offering innovative products and services. To adapt to these changes, Chinese regulators have issued a series of new guidelines aimed at shaping the development of the internet finance industry and reducing risks to financial stability.
The term internet finance covers a wide array of activities in China, including peer-to-peer lending platforms, crowd funding, online payment services, and the sale of financial products such as trusts and insurance on the internet. Many of these new products have grown so quickly that they exist in a regulatory “grey zone” where supervision responsibilities are not yet clearly defined.
On July 18, China’s four financial regulators, the Ministry of Finance, and several other agencies jointly issued Guidance on Promoting the Healthy Development of Internet Finance (Chinese). The document establishes six government goals for the internet finance sector. These include:
- Promoting innovation via internet finance platforms, products, and services and encouraging existing financial institutions to adopt new technology.
- Encouraging cooperation between financial institutions and tech companies.
- Improving access to capital for internet finance firms through promoting venture capital, SME finance, and public listings.
- Reducing administrative approvals and other barriers to development.
- Implementing an appropriate tax system for firms in the industry that benefits small firms and encourages investment in new technology.
- Encouraging the participation of internet finance companies in the development of a national credit information infrastructure.
The above guidelines make it clear that the Chinese government seeks to promote the development of internet finance and believes that these new technologies can have a positive impact on the traditional financial sector. However, the document also includes guidelines for reducing emerging risks such as fraud, money laundering, illegal fundraising, and the unauthorized disclosure of users’ personal information.
In a follow-up press conference (Chinese), a spokesperson from the People’s Bank of China (PBoC) clarified the supervisory responsibilities of China’s various financial regulators with respect to internet finance. The PBoC is responsible for supervising internet payment companies. The China Banking Regulatory Commission (CBRC) is responsible for supervising online lending and borrowing, microfinance, trust products offered online, and online consumer finance. The China Securities Regulatory Commission (CSRC) is responsible for supervising crowd funding and the sale of online mutual and money market funds. Finally, the China Insurance Regulatory Commission (CIRC) is responsible for supervising online insurance products.
Not long after the guidance document was released, the PBoC issued a draft of new rules (Chinese) for the internet payments industry for public comment. The new rules set guidelines for the industry in a number of areas:
- Online payment companies will be required to implement thorough Know Your Customer (KYC) safeguards to prevent fraud and money laundering.
- Online payments cannot be used for cash deposits, credit, financing, wealth management, credit guarantees, and currency exchange.
- Online payment companies should adhere to standards and rules set by the bank card industry.
- Daily payments for a single account should not exceed RMB5,000 ($805) for transactions that use two methods of digital verification. If fewer than two methods are used, daily transactions should not exceed RMB1,000 ($160).
- Transactions for a single account that is verified by five different sources should not exceed RMB200,000 ($32,200) per year. If the account does not have these five verifications, payments should not exceed RMB100,000 ($16,100) per year. Payment amounts in excess of these limits should be handled via the customer’s bank account.
- Greater disclosure will be required for transactions greater than RMB50,000 ($8,050).
- Internet payment companies should join the Payment and Clearing Association of China, a self-regulatory body for the payments industry.
It will be interesting to watch the evolution of these rules. The comment period lasts until August 28th. So far, the public reaction has been somewhat mixed, with many consumers worried that the daily and annual limits are too low. The new rules will be particularly important for Alipay, the country’s largest online payments provider.
Other agencies are also in the process of drafting new regulations for their areas of supervision, such as the CBRC, which began formulating new guidance for peer-to-peer lending in May. New regulations for other areas of the internet finance sector are likely to emerge as regulators work to balance both the risks and opportunities of this new industry.