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Fintech China Global Law O ce 2020CHINA 2 Law and Practice Contributed by: Steven Yu and Vincent Wang Global Law O!ce see p.14 Contents 1. Fintech Market p.4 1.1 Evolution of the Fintech Market p.4 2. Fintech Business Models and Regulation in General p.4 2.1 Predominant Business Models p.4 2.2 Regulatory Regime p.4 2.3 Compensation Models p.5 2.4 Variations Between the Regulation of Fintech and Legacy Players p.5 2.5 Regulatory Sandbox p.5 2.6 Jurisdiction of Regulators p.6 2.7 Outsourcing of Regulated Functions p.6 2.8 Signi!cant Enforcement Actions p.6 2.9 Implications of Additional Regulation p.6 2.10 Regulation of Social Media and Similar Tools p.6 2.11 Review of Industry Participants by Parties Other “an Regulators p.6 2.12 Conjunction of Unregulated and Regulated Products and Services p.7 3. Robo-Advisers p.7 3.1 Requirement for Di#erent Business Models p.7 3.2 Legacy Players Implementation of Solutions Introduced by Robo-Advisers p.7 3.3 Issues Relating to Best Execution of Customer Trades p.7 4. Online Lenders p.7 4.1 Di#erences in the Business or Regulation of Loans Provided to Di#erent Entities p.7 4.2 Underwriting Processes p.8 4.3 Sources of Funds for Loans p.8 4.4 Syndication of Loans p.8 5. Payment Processors p.8 5.1 Payment Processors Use of Payment Rails p.8 5.2 Regulation of Cross-border Payments and Remittances p.8 6. Fund Administrators p.9 6.1 Regulation of Fund Administrators p.9 6.2 Contractual Terms p.9 6.3 Fund Administrators as “Gatekeepers” p.9 7. Marketplaces, Exchanges and Trading Platforms p.9 7.1 Permissible Trading Platforms p.9 7.2 Regulation of Di#erent Asset Classes p.9 7.3 Impact of the Emergence of Cryptocurrency Exchanges p.9 7.4 Listing Standards p.10 7.5 Order Handling Rules p.10 7.6 Rise of Peer-to-Peer Trading Platforms p.10 7.7 Issues Relating to Best Execution of Customer Trades p.10 7.8 Rules of Payment for Order Flow p.10 8. High-Frequency and Algorithmic Trading p.11 8.1 Creation and Usage Regulations p.11 8.2 Exchange-like Platform Participants p.11 8.3 Requirement to Register as Market Makers When Functioning in a Principal Capacity p.11 8.4 Issues Relating to the Best Execution of Trades p.11 8.5 Regulatory Distinction Between Funds and Dealers p.11 8.6 Rules of Payment for Order Flow p.11 9. Financial Research Platforms p.11 9.1 Registration p.11 9.2 Regulation of Unveri!ed Information p.11 9.3 Conversation Curation p.11 9.4 Platform Providers as “Gatekeepers” p.11 10. Insurtech p.12 10.1 Underwriting Processes p.12 10.2 Treatment of Di#erent Types of Insurance p.12CHINA CONTENTS 3 11. Regtech p.12 11.1 Regulation of Regtech Providers p.12 11.2 Contractual Terms to Assure Performance and Accuracy p.12 11.3 Regtech Providers as “Gatekeepers” p.12 12. Blockchain p.12 12.1 Use of Blockchain in the Financial Services Industry p.12 12.2 Local Regulators Approach to Blockchain p.13 12.3 Classi!cation of Blockchain Assets p.13 12.4 Regulation of “Issuers” of Blockchain Assets p.13 12.5 Regulation of Blockchain Asset Trading Platforms p.13 12.6 Regulation of Invested Funds p.13 12.7 Virtual Currencies p.13 12.8 Impact of Privacy Regulation on Blockchain p.13 13. Open Banking p.13 13.1 Regulation of Open Banking p.13 13.2 Concerns Raised by Open Banking p.13LAW AND PRACTICE CHINA Contributed by: Steven Yu and Vincent Wang, Global Law O!ce 4 1. Fintech Market 1.1 Evolution of the Fintech Market Over the last twelve months, the Chinese government has made serious e#orts to enhance the regulation over the !nance-relat- ed industry and to solve concerns over personal information leakage. It continues cracking down and cleaning up the peer- to-peer (P2P) lending business and other !ntech businesses that cannot satisfy the regulatory requirements or impose new industrial stability risks. Such an e#ort shows that the Chinese government is cautious about the new challenges the !ntech businesses bring to the existing compliance and regulatory mechanism. Although the government encourages the development of !ntech, it does not want anyone to conduct illegal or non- compliant businesses under the name of !ntech, or the !ntech to impose other regulatory or compliance risks, whether such risks are within the banking industry regulation or from other industry regulatory perspective. For example, not long a$er the facial recognition payment technology rolled out nationwide, the Cyberspace Administration of China (CAC) has expressed its concern over the potential misappropriation of the facial information of individuals. To address such a concern, the Payment and Clearing Association of China (a self-discipline industry association, PCAC) quickly issued the Self Discipline Convention this year to reiterate the data security and privacy policies that should apply to the facial recognition payment. Notwithstanding the foregoing, China is dedicated in the devel- opment of !ntech. Peoples Bank of China (the central bank of China, PBOC) issued the Development Plan on !ntech (2019- 21, the “Development Plan”) in the middle of 2019, which gen- erally summaries the plan and governments attitude towards !ntech. “e major tasks described in the Development Plan include: the strategic planning of !ntech; the reasonable application of !ntech; application of the !ntech in !nancial service; the technical ability to prevent !nancial risks; censorship of !ntech; and support to the !ntech industry. It is anticipated that in 2020, the !ntech industry will continue to grow given the policy described in the Development Plan. In addition, China is scheduled to issue its digital currency in 2020. Chinas digital currency will be a sovereign currency in digital form, which makes it di#erent from Bitcoin or Libra. It is also expected that China will continue improving its regula- tory regime to address the new risks and challenges raised by !ntech. “erefore, “innovation” and “compliance” will be two main themes for all !ntech business participants in China. It is interesting and fascinating to see how those two main themes reach a “balanced” status by both the regulatory authorities and the !ntech business participants. 2. Fintech Business Models and Regulation in General 2.1 Predominant Business Models Robotic Process Automation (RPA) and internet !nance are currently the two predominate !ntech business models in Chi- na. “e application of RPA can largely improve the processing e%ciency in data collection, veri!cation and simple analysis and are widely used by traditional players such as banks, securities !rms, insurance companies, trust companies and FMCs (fund management companies) as well as new comers such as pay- ment companies, lending service providers, supply chain service providers and robo-advisers, and there is a trend that RPA will replace human power in repeated work. Internet plus !nance has grown very fast throughout the whole !nancial industry of China over the past decade, and now with numerous technol- ogy companies who provide solutions to or collaborate with !nancial institutions, we see it continues to develop and will develop into a new stage based on high technologies of AI (arti- !cial intelligence), big data, cloud computing and IOT (internet of things). 2.2 Regulatory Regime Chinas legal system is based on the civil law system, therefore the sources of law governing !ntech industry are all in the form of code law. Currently, it is in the form of various laws, admin- istrative regulations, rules, policies and circulars at the central government level, among which the most important laws and regulations include: fundamental laws that may be applicable in !ntech busi- nesses such as: (a) PRC General Principles of Civil Law and PRC General Provisions of the Civil Law, both adopted by the Na- tional Peoples Congress (NPC); (b) PRC Contract Law adopted by the NPC; (c) PRC Tort Liability Law adopted by the standing com- mittee of the NPC; (d) PRC Law of the Peoples Bank of China adopted by the NPC; (e) PRC Criminal Law adopted by the NPC; (f) PRC Law on Anti-money Laundering adopted by the standing committee of the NPC; (g) PRC Cybersecurity Law adopted by the standing com- mittee of the NPC; andCHINA LAW AND PRACTICE Contributed by: Steven Yu and Vincent Wang, Global Law O!ce 5 (h) PRC Consumer Protection Law adopted by the stand- ing committee if the NPC; and laws and regulations governing activities of !nancial institu- tions or concerning a particular industrial sector such as: (a) PRC Law on Commercial Banks adopted by the stand- ing committee of the NPC; (b) PRC Securities Law adopted by the standing committee of the NPC; (c) PRC Insurance Law adopted by the standing committee of the NPC; (d) PRC Trust Law adopted by the standing committee of the NPC; (e) Certi!cation Rules on !ntech Products issued by the Certi!cation and Accreditation Administration of the PRC; (f) Guiding Opinions on Promoting the Sound Develop- ment of Internet Finance jointly by PBOC, CAC, the Ministry of Industry and Information Technology (MIIT) and seven other central governmental agencies; (g) Guiding Opinions on Regulating the Asset Manage- ment Business of Financial Institutions issued by the PBOC, the China Banking and Insurance Regulatory Commission (CBIRC), the China Securities Regulatory Commission (CSRC) and the State Administration of Foreign Exchange (SAFE); (h) Measures for Payment and Settlement and Administra- tion Measures on Payment Services by Non-!nancial Institutions, both issued by the PBOC; (i) Interim Measures for the Administration of the Business Activities of Online Lending Information Intermediary Institutions jointly issued by the CBIRC (former China Banking Regulatory Commission), MIIT, CAC and the Ministry of Public Security (MPS); (j) Administration Measures on Electronic Bank Business issued by the CBIRC (former China Banking Regula- tory Commission); (k) Interim Measures on Internet Insurance Business issued by the CBIRC (former China Insurance Regulatory Commission); (l) Notice on Improving E#orts in Regulating the Conduct of Asset Management Business through Internet and Carrying Out Acceptance Inspection Work issued by the PBOC; (m) Administration Measures on Transactions through Network issued by the State Administration for Market Regulation (SAMR, the former State Administration for Industry and Commerce); and (n) Technical Norms for Protection of Personal Financial Information issued by the PBOC. 2.3 Compensation Models “e following compensation models are observed in market practice: broker fee charged on merchants or both merchants and customer where a !nancial product is sold through the platform operated by a Fintech service provider, handling fee charged on users of third-party payment service, membership fee or package fee charged on users of robo-adviser services and technology service fee/information service fee charged on !nancial institutions who purchase and receive services from a technical company who can provide Fintech solutions. In each compensation model, a clear rate of service charge must be noti- !ed to customers/users in advance, with a written or electronic record of charge provided later. 2.4 Variations Between the Regulation of Fintech and Legacy Players Legacy players such as banks, securities !rms and insurance companies are highly regulated in China. “e Chinese regu- lators are in the process of setting up a licensing system and adopting new regulatory models with respect to !ntech indus- try participants in innovative practice areas, as long as they view such new participants as performing !nancial services. A good example lies in the payment industry, which is that the !ntech company is required to obtain payment licences, com- pared with the legacy players that are not required to obtain a special licence to perform payment business given that they are licensed to perform traditional banking services. Another example is that an online distributor of !nancial products must qualify as a licensed !nancial institution (ie, FMCs, banks or other !nancial institutions, as applicable, who are allowed to sell certain kinds of !nancial products to the public). It is hard to say that a !ntech company is less regulated than a legacy player in terms of meeting the market access and regulatory compliance requirements, if services performed by such !ntech companies may bring a similar risk to customers, although not in exactly the same manner. 2.5 Regulatory Sandbox Pilot programs on regulatory sandboxes have been carried out by the local government in several Chinese cities (including Bei- jing) before and in 2019. In early 2020, the PBOC announced for the !rst time at the central governmental level six programs on regulatory boxes, focused on innovative areas of IOT (intent of things), big data, AI (arti!cial intelligence), block chain and API (Application Programming Interface). “e 11 pilot companies selected by the PBOC under the said sandbox programs include state-owned and joint stock banks, urban banks, settlement and payment service providers and hi-tech companies. “rough the sandbox, the PBOC and other regulators can take a close look at how such sandbox companies will run under the policy- supporting environment, what risk may arise from innovative products, services and business models, and how it can be con-LAW AND PRACTICE CHINA Contributed by: Steven Yu and Vincent Wang, Global Law O!ce 6 trolled or dealt with. According to the PBOC, following the step of Beijing, nine other major cities and provinces of China are anticipated to initiate their localised sandbox programs in 2020. 2.6 Jurisdiction of Regulators In China, the !ntech industry participants are generally regu- lated by the following main regulators: the PBOC which is the top policy maker under the State Council promoting the development of !ntech industry in China; the SAMR and its local branches, which are in charge of !ntech companies industrial and commercial registration and normal business conduct; the MIIT and its local branches, which regulate telecommu- nication-related services involved in the !ntech industry; the CAC, which regulates network safety, data compliance and other relevant issues arising from internet data exchange and processing involved in the !ntech industry; !ntech participants are also regulated in accordance with laws and regulations of the !nancial supervision bodies, ie, CBIRC and CSRC, if they are viewed by the regulators as carrying out relevant !nancial busi
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