2023.02.07 XIE, Qing (Natasha)、ZHANG, Chi (Austin)、LUO, Danchen、ZHANG, Lin
On December 30, 2022, the China Securities Regulatory Commission (CSRC) released a statement on its official website about promoting the rectification of illegal W88优德中国官方网站 business by two overseas companies1. It stated that the two companies’ offering of securities services to mainland investors without approval violated the Securities Law (amended in 2019) (the “Securities Law”) and other relevant laws and regulations, and constituted an illegal operation of securities businesses. The CSRC also said that it has made a public statement on October 15, 2021, highlighting that foreign securities operation institutions that carry out W88优德中国官方网站 securities businesses without approval do not comply with the Securities Law, the Regulations on Supervision and Management of Securities Companies and other laws and regulations and it will act to regulate such activities according to the laws. According to the CSRC, it had a regulatory talk with the two companies’ senior management personnel and required them to comply with relevant laws and regulations. Furthermore, the CSRC plans to follow a regulatory approach to "effectively cease opening a new business and orderly dissolve an existing business" and require the two companies to rectify their illegal activities. Specifically, it plans to ban the two companies from engaging in any new business in mainland China and require them to cease soliciting mainland clients or onboarding any new mainland clients/opening new accounts. The CSRC also plans to require the two companies to properly handle their existing businesses. For the sake of market stability, the CSRC allows existing mainland investors to continue trading through their original overseas brokers, but it clearly points out that overseas brokers are prohibited from allowing any new funds to be transferred to such investors' accounts in violation of China's foreign exchange control. Lastly, the CSRC added that it will dispatch officers to conduct onsite inspections on the two companies and supervise and urge their rectifications, and may take further regulatory measures depending on the rectification.
We have summarized the latest legislative developments and insights from PRC financial regulators regarding W88优德中国官方网站 financial business and draw attention to compliance issues for clients that are involved in this area.
I. Legislative Developments in W88优德中国官方网站 Financial Business
In recent years, the legislative bodies and relevant financial regulators of China have successively promulgated new financial laws, regulations and department rules to provide a legal basis for the regulation of W88优德中国官方网站 financial business.
The Futures and Derivatives Law of the People’s Republic of China (promulgated on April 20, 2022 and effective from August 1, 2022) (FDL) specifies that foreign futures exchanges must register with the futures regulatory authority of the State Council if they intend to provide Chinese domestic entities or individuals with direct access to trading systems for their trading activities. Foreign futures operation institutions must do the same if they want to conduct relevant futures trading abroad on behalf of a Chinese domestic futures operation institution. This is the first time at a financial statute level that China has explicitly imposed a registration requirement on W88优德中国官方网站 financial service providers. The FDL also provides that approval by the futures regulatory authority of the State Council is required for foreign institutions engaged in futures marketing, promotion and solicitation activities within the territory of the PRC, as do domestic institutions conducting futures marketing, promotion or solicitation activities for any foreign institutions within the PRC. The relevant PRC regulators may take regulatory measures against foreign institutions and persons in charge for violations pursuant to the FDL.
The Securities Law does not mention W88优德中国官方网站 securities businesses specifically, but relevant provisions have been spelled out in the pertinent regulations and departmental rules. Article 95 of the Regulation on Supervision and Management of Securities Companies (amended in 2014) stipulates that “foreign securities operation institutions that operate a securities business or set up a representative office in China shall obtain approval from the securities regulatory authority of the State Council”. The Administrative Measures for Securities Brokerage Businesses issued by the CSRC on January 13, 2023 (effective from February 28, 2023) (“the Measures”) clarify the circumstances that constitute “operating a securities business in China by foreign securities operation institutions” as provided by Article 95 of the Regulation on Supervision and Management of Securities Companies (amended in 2014). According to Article 46 of the Measures, if a foreign securities operation institution carries out (directly or indirectly through its affiliate or business partner) marketing, account opening or related activities for overseas securities trading services in China in violation of Article 95 of the Regulation on Supervision and Management of Securities Companies (amended in 2014), penalties will be imposed according to Article 202 of the Securities Law. This provides a statutory basis for CSRC’s law enforcement actions on illegal W88优德中国官方网站 brokerage businesses carried out by foreign securities operation institutions.
The People’s Bank of China (PBOC), for the first time, provides for the W88优德中国官方网站 delivery of services by overseas financial infrastructures in the Measures for the Supervision and Administration of Financial Infrastructures (Draft for Comment) released on December 14, 2022, which specifies the market entry requirements, conditions, and reporting obligations in W88优德中国官方网站 delivery. This indicates that W88优德中国官方网站 financial businesses may be more regulated in broader financial legislations and may soon be a focus of regulatory enforcement.2
II. Positions Taken by Financial Regulators
In January 2020, Sun Tianqi, head of the Financial Stability Department of the PBOC, published an article entitled The Opening-up and Supervision of W88优德中国官方网站 Supplied Financial Services in the Financial Technology Context (the “2020 Article”), in which he discussed the different categories of illegal foreign-provided financial services and underlined the focus of regulators in W88优德中国官方网站 supply. Following this, Mr. Sun delivered a speech in October 2021 called The Realization of National Boundaries and Client Group Boundaries of Financial Licenses in the Digital Context, presented at the Third Bund Financial Submit (the “2021 Speech”). Mr. Sun pointed out in the 2021 Speech that foreign institutions providing financial services from abroad via the Internet constitute an unapproved W88优德中国官方网站 supply and these are illegal financial activities3. Echoing the 2020 Article and the 2021 Speech, Mr. Sun published another article on the same issues in February 2022 entitled Reflections on the Effectiveness of Financial Regulation in the Digital Economy in China Finance (the “2022 Article”)4, in which he reiterated the principle of “the licensed operation of financial businesses”. He highlighted that it is illegal for foreign institutions to engage in prohibited businesses, engage in businesses that are not yet open to foreign investors or engage in businesses with only foreign licenses within the territory of China, all of which shall be determined as illegal financial activities . As a senior officer at PBOC, Mr. Sun’s views regarding the legitimacy and limits of W88优德中国官方网站 financial services, in our view, should not only be read in the context of digital or financial technology, but the regulatory principles contained therein shall apply to all types of W88优德中国官方网站 supply of financial services or products, irrespective of the “digital” or “financial technology” context.
On a related note, in July 2016, the CSRC released a risk warning of illegal securities and futures W88优德中国官方网站es on its website5. This risk warning targeted the scenario whereby foreign securities operation institutions provided trading access or services to domestic investors to invest in foreign securities markets through the platform protocols or mobile terminals of domestic internet companies and by cooperating with such domestic internet companies. The CSRC pointed out that, according to the Securities Law (amended in 2014), no entity or individual is permitted to engage in securities business without the approval of the securities regulatory authority of the State Council; and according to the Regulations on Supervision and Management of Securities Companies, foreign securities operation institutions that operate a securities business shall obtain approval from the securities regulatory authority of the State Council; therefore, the legality of the foreign securities operation institutions’ activities is questionable. The CSRC’s recent regulatory actions toward illegal W88优德中国官方网站 financial businesses highlight this position i.e., that W88优德中国官方网站 financial businesses are subject to approval, and it may indicate a trend of enhanced law enforcement along with the recent rectification campaign.
III. Our Observations
W88优德中国官方网站 financial business has developed rapidly in recent years. PRC regulators have long faced the challenges of making legislation and mobilizing limited law enforcement resources to respond in a timely manner to the relevant issues. Article 46 of the Administrative Measures for Securities Brokerage Businesses may indicate a trend towards including certain regulatory principles for W88优德中国官方网站 financial businesses into financial law-making. Furthermore, the CSRC’s desire to rectify illegal W88优德中国官方网站 business by the two companies may indicate that it has formulated initial handling measures for a wider range of illegal W88优德中国官方网站 financial businesses and following that, it may take further law enforcement actions for any violations. We advise foreign financial institutions to prudently evaluate and manage the compliance risks involved in their W88优德中国官方网站 businesses and to revisit and update their internal compliance policies to guide their behaviour and their staff. We will continue to monitor the situation and keep our clients apprised of important developments in this respect.
1. See http://www.csrc.gov.cn/csrc/c100028/c6940083/content.shtml.
2. For more details, please refer to JunHe Client Briefing “People's Bank of China Solicits Comments on the Measures for the Supervision and Administration of Financial Infrastructures” published on January 28, 2023.
3. For more details, please refer to JunHe Client Briefing “Regulation of W88优德中国官方网站 Supply of Foreign Financial Services – What's Next?”, published on November 16, 2021.
4. Please refer to Sun Tianqi, Reflections on the Effectiveness of Financial Regulation in the Digital Economy, China Finance, No.03, 2022, pp. 15-17.
5. See http://www.csrc.gov.cn/csrc/c106299/c1600712/content.shtml.
