Karl Zhang
On September 11, 2020, the People’s Bank of China issued the Interim Measures on Supervision and Administration of Financial Holding Companies (the “Measures”), which came into effect on November 1, 2020. The Measures are highlighted below:
I. Scope and the competent authority
“Financial holding companies” per the Measures refer to limited liability companies or companies limited by shares that control two or more different types of financial institutions, while it only engages in equity investment management instead of any direct commercial business activities. These Measures apply to financial holding companies whose controlling shareholders or actual controllers are domestic non-financial enterprises, natural persons and recognized legal persons. The regulatory policies and standards for financial groups that are formed through cross-industry investment holdings by financial institutions shall be based on these Measures, with specific rules to be separately prescribed.
The People’s Bank of China shall regulate financial holding companies and review and approve their formation, alteration, termination and business scope. Per the division of responsibilities for financial supervision functions, the financial administration authority under the State Council shall regulate the financial institutions that are controlled by a financial holding company. The Ministry of Finance shall be responsible for developing and organizing the implementation of the financial systems for financial holding companies.
II. Circumstances and basic conditions for establishment.
If a non-financial enterprise, a natural person, or a recognized legal person who has substantial control over two or more financial institutions of different types and further falls under one of the following circumstances, they shall establish a financial holding company: (1) the financial institutions under substantial control include a commercial bank and the combined total assets of the financial institutions are not less than RMB 500 billion, or if the total assets of the financial institutions are less than RMB 500 billion, but the assets of the financial institutions other than the commercial bank are not less than RMB 100 billion or the total assets they are managing under trust are not less than RMB 500 billion; (2) the financial institutions under substantial control do not include a commercial bank, and the combined total assets of financial institutions are not less than RMB 100 billion or the total assets they are managing under trust are not less than RMB 500 billion; (3) the combined total assets of the financial institutions under substantial control or the total assets they are managing under trust do not meet the standards set forth in Subparagraphs (1) and (2), but the People’s Bank of China has otherwise deemed that a financial holding company needs to be established pursuant to the need for broad and prudential regulation.
To apply for the establishment of a financial holding company, the following conditions shall be met in addition to the conditions prescribed in the Company Law of the People’s Republic of China: (1) the paid-in registered capital is not less than RMB 5 billion and 50% of the total registered capital of the directly controlled financial institutions; (2) the shareholders and actual controlling entities of the financial holding company shall comply with the relevant laws and administrative regulations, decisions of the State Council and these Measures; (3) the directors, supervisors and senior executives satisfy their job requirements; (4) a sound organizational structure with effective risk management and internal control systems; and (5) the applicant is capable of continuously replenishing capital for the controlled financial institutions. In addition, other prudential conditions will also need to be met.
III. Corporate governance and synergy
A financial holding company shall have a simple, clear and transparent shareholding structure, with identifiable actual controllers and ultimate beneficiaries, a reasonable legal person hierarchy that is commensurate with its capital, operational and management capacity and risk management level. Effort shall be made to strengthen corporate governance structure, participate in the corporate governance of controlled entities and promote their safe and stable operation.
When customer information, sales teams, information technology systems, operational support, business premises and other resources are shared between and among a financial holding company and its controlled entities, or between and among the controlled entities in business collaboration efforts, the rights and interests of the customers shall not be infringed upon, and it shall be clearly specified which entities are assuming the risks to prevent unclear responsibilities, commingling and conflicts of interest. When customer information is shared between and among a financial holding company and its controlled entities controlled within the group, it is necessary to ensure legal compliance, risk control as well as obtained customer authorization and consent to prevent improper use of customer information. When providing integrated financial services, the controlled entities shall respect the customers’ right to know and right to choose.
IV. Consolidated financial reporting and risk management
A financial holding group shall implement consolidated financial reporting of the entities that conduct financial activities within the group. Entities that are not controlled by a financial holding company shall be included in the consolidated management if any of the following circumstances is present: (1) although the assets of the invested entities operating the same type of business accounts make up a relatively small percentage of the consolidated assets of the financial holding company, but the combined business and risks are sufficient to cause material impact on the financial conditions and risk levels of the financial holding company; (2) the risks and losses of the invested entities are sufficient to cause material impact on the financial holding company, including but not limited to liquidity risk, legal compliance risk, reputational risk, etc.; or (3) there is sufficient evidence to indicate that the other invested entities established by domestic and overseas holding entities, shell companies or other complex shareholding designs are substantially controlled by the financial holding company, or that the operation and management of such entities are materially affected by the financial holding company.
A financial holding company and its controlled entities shall not engage in the following related transactions: (1) using its substantial control right to infringe on the rights and interests of the other shareholders and customers; (2) regulatory arbitrage through internal transactions; (3) indirect insider transactions through third parties that impair the stability of the financial holding company; (4) a financial institution (other than financing companies) controlled by the financial holding company providing loans to the financial holding company, or unsecured loans to any shareholder of the financial holding company or any other related party that is not a financial institution; (5) a financial institution (other than financing companies) controlled by the financial holding company providing loans or guarantees to related parties of the financial holding company making up more than 10% of its net capital, or 20% of the net capital of the related parties receiving such loans or guarantees, except as otherwise stipulated by the banking and insurance regulatory authority and the securities regulatory authority under the State Council; (6) using the shares of financial institution (other than financing companies) controlled by the financial holding company or of a non-financial institution controlled by the financial holding company as collateral for a pledge; (7) the balance of the guarantee provided by the financial holding company to parties outside of the financial holding group is more than 10% of the net assets of the financial holding company; or (8) engaging in other acts prohibited by the People’s Bank of China.
V. Supervision and administration
The People’s Bank of China shall engage in consolidated supervision over financial holding companies in accordance with laws, administrative regulations, decisions of the State Council, and the Measure. In terms of consolidated reporting management, it shall monitor, evaluate, prevent and resolve the overall capital adequacy, related transactions, liquidity and goodwill risks faced by financial holding companies through a reporting system, onsite inspections, supervisory conversations, risk assessment and early warnings, thereby maintaining the overall stability of the financial system. If a financial holding company meets the criteria for recognition as a systemically important financial institution, it shall comply with the regulations on systemically important financial institutions.
If a financial holding company finds it difficult to sustain its operation and a failure to exit the market would seriously jeopardize the financial order and undermine public interest, it shall exit the market in accordance with law. The People’s Bank of China has the right to require a financial holding company to formulate an overall recovery and disposition plan for the entire financial holding group and report it to the People’s Bank of China for recordation.