Draft Amendment – Redrawing the Lines of Banking Supervision in China

Paragraph 2 of Article 2 For the purposes of this Law, banking financial institutions refer to financial institutions established within the territory of the People's Republic of China that take public deposits, such as commercial banks, urban credit cooperatives, and rural credit cooperatives, as well as policy banks.

Paragraph 2 of Article 3 For the purposes of this Law, banking financial institutions refer to financial institutions established within the territory of the People's Republic of China that take public deposits, such as commercial banks and rural credit cooperatives, as well as policy banks.

Paragraph 3 of Article 2 The supervision and administration of financial asset management companies, trust investment companies, finance companies, financial leasing companies, and other financial institutions established upon the approval of the banking supervision and administration institution of the State Council shall be governed by the provisions of this Law concerning the supervision and administration of banking financial   institutions.

Paragraph 3 of Article 3 The supervision and administration of financial holding companies, financial asset management companies, trust companies, enterprise group finance companies, financial leasing companies, auto finance companies, consumer finance companies, money brokerage firms, wealth management companies, and other financial institutions established   upon the approval of the banking supervision and administration institution of the State Council shall be governed by the provisions of this Law concerning the supervision and administration of banking financial institutions.

Corporate Compliance Requirements

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Article 18 When the banking regulatory authority of the State Council approves the establishment of a banking financial institution, it shall review the following conditions:

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(3) The major shareholders and actual controllers shall have sound financial status and a record of integrity, and shall meet the conditions under laws, administrative regulations, and the rules prescribed by the banking regulatory authority of the State Council.

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• The financial and integrity requirements for major shareholders of banks are not new.  They have been provided under Article 5 of the Interim Measures for the Equity Management in Commercial Banks (《商业银行股权管理暂行办法》, the "Equity   Management Measures").

•  The financial and integrity requirements for actual controllers of banks are not explicitly provided in existing regulatory framework.  The Draft Amendment for the first time extends equivalent regulatory requirements to actual controllers of banks.

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Article 19 The banking regulatory authority under the State Council shall examine and approve the following matters of change for banking financial institutions:

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(7) Change of major shareholders or   actual controllers;

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• Article 24 (5) of the Commercial Banks Law (2015 Revision) (《商业银行法(2015修正)》, the "Commercial Banks Law") only provides that any change in shareholders holding more than five percent (5%) of the total capital or total shareholding of a commercial bank (i.e., major shareholders) shall be subject to approval by NFRA.

• The Draft Amendment further adds a change in the   actual controller of banks as an approval item, while the change in actual controllers (whether the actual controllers of banks or actual controllers of   shareholders of banks) is currently not subject to approval by NFRA but only needs to be reported and/or disclosed.  Under the current regulatory framework,   Article 36 of the Equity Management Measures requires major shareholders of a commercial bank to timely report to the commercial bank any change in their actual controllers; and Article 40 of the Equity Management Measures empowers NFRA to request information on the actual controllers of the shareholders from the bank.  Banks are also required under Article 93 of the Corporate Governance Guidelines to disclose the change in the actual controllers of the banks within ten (10) business days   of such change.

Article 17 When an application is made to establish a banking financial institution, or when a banking financial institution changes its shareholder who holds more than the prescribed   proportion of the total capital or total shares, the banking regulatory authority under the State Council shall examine the shareholder's source of funds, financial status, capital replenishment capability, and   integrity status.

Article 21 When an application is made to establish a banking financial institution, or when a banking financial institution changes its major shareholder or actual controller, the banking regulatory authority under the State Council shall examine the major shareholder' and actual controller' source of funds, financial status, capital replenishment capability, equity structure, and integrity status.

The major shareholder of the banking financial institution, and the controlling shareholder and actual controller of such major shareholders who are subject to examination in accordance with the preceding paragraph shall also meet the conditions stipulated by laws, administrative regulations, the State Council, and the banking regulatory authority under the State Council.

The 2016 Law focused on major shareholders while the Draft Amendment further brings actual controllers under direct regulatory scrutiny.  The Draft Amendment also extends compliance obligations to the controlling shareholders and actual controllers of major shareholders of the banks.  This aligns with Article 40 of the Equity Management Measures, which mandates NFRA to conduct look-through supervision on major shareholders alongside their affiliates, parties acting in concert, and ultimate beneficial owners.

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Article 27 Shareholders of a banking financial institution shall perform their capital contribution obligations in accordance with the law, using their own funds for capital contribution, unless otherwise stipulated by the state.  No entity or individual shall, in violation of regulations, entrust others to hold or accept entrustment from others to hold equity in a banking financial institution.

This is not a new requirement.  Similar requirements have been provided in Articles 10 and 12 of the Equity Management Measures, Article 16(1) of the Corporate Governance Guidelines   for Banking and Insurance Institutions (《银行保险机构公司治理准则》, the "Corporate Governance Guidelines"), and Article 7 of the Measures for the Supervision of the Conduct of Major Shareholders of Banking and Insurance Institutions (Trial)(《银行保险机构大股东行为监管办法(试行)》, the "Supervision Measures of Major Shareholders"), which require shareholders to make capital contributions using their own funds and forbid entrusted or nominee shareholding arrangements.

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Article 28 The major shareholders of a banking financial institution shall, in accordance with the relevant regulations, disclose to the banking financial institution, layer by layer, their shareholding structure up to the actual controller, as well as their affiliated relationships with other shareholders.  They shall report any information regarding themselves, their controlling shareholders, actual controllers, or related parties that may affect the qualification of shareholders or result in changes to the shareholding structure of the banking financial institution, in a timely, accurate, and complete manner.  The specific measures for administration shall be formulated by the banking regulatory authority of the State Council.

These look-through equity management requirements align with Articles 12 and 36 of the Equity Management Measures, Article 16(3) of the Corporate Governance Guidelines and Article 8 of the Supervision Measures of Major Shareholders.

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Article 29 The shareholders and actual controllers of a banking financial institution shall not engage in the following acts:

(1) Interfering with the management and operation of the banking financial institution in violation of regulations;

(2) Illegally occupying or appropriating the assets of the banking financial institution, or the funds of depositors and other clients;

(3) Conducting related-party transactions with the banking financial institution in violation of regulations;

(4) Making false contributions or withdrawing contributions improperly;

(5) Transferring or pledging equity in violation of regulations;

(6) Engaging in other acts in violation of laws, administrative regulations, or the rules prescribed by the banking regulatory authority of the State Council.

The controlling shareholders and actual controllers of the major shareholders of a banking financial institution shall also not engage in any of the acts listed above.

Banking financial institutions and their employees shall not assist the shareholders, actual controllers, or the controlling shareholders and actual controllers of major shareholders in engaging in the acts specified in the preceding two paragraphs.

• Under the current regulatory framework, several different rules provide for the negative list governing the conduct of major shareholders of banks, controlling shareholders and actual controllers of major shareholders of banks, and/or controlling shareholders and actual controllers of banks with varying degrees and with different focuses, such as Articles 18, 21, 22 and 23 of the Equity Management Measures, Article 14 of the Supervision Measures of Major Shareholders, Article 16 of the Corporate Governance Guidelines, and other related rules.  The Draft Amendment introduces a unified negative list that equally applies to shareholders and actual controllers of banks, as well as the controlling shareholder and actual controller of each major shareholder of the bank.

• In addition, the Draft Amendment emphasizes that employees of banks shall not assist the aforementioned entities or persons to commit any violation, such as interfering with management or misappropriating funds.

Reporting and Information Disclosure

Article 33 For the purpose of performing its regulatory functions, the banking regulatory authority shall have the power to require banking financial institutions to submit, in accordance with relevant regulations, balance sheets, profit and loss statements and other materials related financial accounting, statistical statements and operational and management, as well as   audit reports issued by certified public accountants.

Paragraph 1 of Article 45 For the purpose of performing its regulatory functions, the banking regulatory authority shall have the power to require banking financial institutions to submit, in accordance with relevant regulations, financial accounting reports, statistical statements, and other documents and materials related to business operations and management.  It may also require the major shareholders and actual controllers of banking financial institutions to provide relevant documents and materials within a specified time limit.

Documents and materials submitted or provided by banking financial institutions and their major shareholders and actual controllers to the banking regulatory authority shall be true, accurate, and complete.

Compared with the 2006 Law, the reporting obligations have been expanded from banks to their major shareholders and actual controllers.  This should not cause additional reporting obligations for major shareholders of banks, as Article 40 of the Equity Management Measures already requires all shareholders of banks to report relevant information as required by NFRA, but the actual controllers of banks are not subject to express reporting obligations under the current regulatory framework.

Article 36 The banking regulatory authority shall order   banking financial institutions to truthfully disclose to the public, in accordance with regulations, their financial and accounting reports, risk management status, changes in directors and senior management personnel, and other material matters.

Article 50 Banking financial institutions shall, in accordance with regulations, truthfully disclose to the public their financial and accounting reports, risk management status, equity and related-party transaction information, changes in directors, supervisors, and senior management personnel, and other material matters.

The major shareholders and actual controllers of banking financial institutions shall cooperate with the banking financial institutions in fulfilling the information disclosure obligations stipulated in the preceding paragraph.

• Compared with the 2006 Law, the Draft Amendment expands the scope of disclosure to include equity structures, related-party transactions, and change in supervisors.  However, these requirements are not new as they have been provided under existing rules, such as the Equity Management Measures and the Information Disclosure Measures for Commercial Banks (《商业银行信息披露办法》).

• The Draft Amendment further adds that major shareholders and actual controllers of banks shall cooperate with banks on information disclosure, which is not new for major shareholders and those actual controllers of banks which are also actual controllers of bank shareholders, as similar requirement has been provided under Article 48 of the Equity Management Measures.

Regulatory Measures

Article 35 The banking regulatory authority may, in light of the   needs of performing its duties, conduct regulatory talks with the directors and senior management personnel of banking financial institutions, and require them to make explanations on the major matters concerning the business activities and risk management of such institutions.

Article 49 In order to guard against risks and maintain market order, the banking regulatory authority may take measures such as issuing risk warnings, putting forward regulatory opinions, and conducting regulatory talks against banking financial institutions as well as their directors, supervisors, senior management personnel, major shareholders, actual controllers, and other relevant personnel.

Under the 2006 Law, NFRA may take regulatory measures against directors and senior management, while the Draft Amendment empowers NFRA to adopt wider regulatory measures against banks and additional persons, including supervisors, major shareholders, actual controllers, and other relevant personnel.  The scope of "other relevant personnel" is not clearly defined, but it is likely that business head, key persons of specific business or anyone else who takes direct responsibility would be deemed relevant personnel.

Article 37 Where a banking financial institution violates the rules of prudent operation, the banking regulatory authority under the State Council or its provincial-level dispatched office shall order it to make corrections within a prescribed period.  If such institution fails to make corrections by the deadline, or if its conduct seriously endangers its sound operation or harms the legitimate rights and interests of depositors and other customers, the following measures may be taken, depending on the circumstances, upon approval by the person in charge of the banking regulatory authority under the State Council or its provincial-level dispatched office:

(1) Order the suspension of certain business activities and cease the approval of new business operations;

(2) Restrict the distribution of dividends and other income;

(3) Restrict the transfer of assets;

(4) Order the controlling shareholder to transfer its equity or restrict the rights of relevant shareholders;

(5) Order the replacement of directors or senior management personnel, or restrict their rights;

(6) Cease the approval for establishing new branches.

After rectification, the banking financial institution shall submit a report to the banking regulatory authority under the State Council or its provincial-level dispatched office.  If, upon inspection and acceptance, the institution is found to be in compliance   with the relevant rules of prudent operation, the relevant measures specified in the preceding paragraph shall be lifted within three days from the date of completion of the inspection.

Article 51 Where a banking financial institution violates the rules of prudent operation, the banking regulatory authority under the State Council or its provincial-level dispatched office shall order it to make corrections within a prescribed period.  If such institution fails to make corrections by the deadline, or if its conduct seriously endangers its sound operation or harms the legitimate rights and interests of depositors and other customers, the following measures may be taken, depending on the circumstances, upon approval by the person in charge of the banking regulatory authority under the State Council or its provincial-level dispatched office:

(1) Restrict or suspend certain business activities, cease the approval of new business operations, and cease the approval for establishing new branches;

(2) Restrict the distribution of or restrict the distribution of dividends to relevant shareholders, and restrict the payment of remuneration and provision of benefits to directors, supervisors, and senior management personnel;

(3) Restrict the transfer of assets, significant expenditures, or the creation of other rights on assets;

(4) Order the transfer of assets or business;

(5) Order major shareholders to replenish capital within a prescribed period in accordance with regulations;

(6) Order the responsible shareholders or actual controllers to transfer their equity or shift actual control within a prescribed period, or restrict their rights;

(7) Order the replacement of directors, supervisors, or senior management personnel, or restrict their rights;

(8) Other measures as stipulated by laws and administrative regulations.

Where the shareholders or actual controllers of a banking financial institution abuse their shareholder rights or control, thereby harming the legitimate rights and interests of the banking financial institution, depositors, and other customers, the banking regulatory authority under the State Council or its provincial-level dispatched office shall order them to make corrections within a prescribed period.  If they fail to make corrections by the deadline or if the circumstances are serious, the measures specified in the first paragraph may be taken, depending on the circumstances, and they may be prohibited from investing in banking financial institutions again.

After rectification, the banking financial institution or its relevant shareholders or actual controllers shall submit a report to the banking regulatory authority under the State Council or its provincial-level dispatched office.  If, upon inspection and acceptance, the institution is found to have met the corresponding rectification requirements, the relevant measures specified in the preceding two paragraphs shall be lifted within three days from the date of completion of the inspection.

• The Draft Amendment empowers NFRA to take more regulatory measures against violations, such as restricting banks from paying remuneration to directors, supervisors and senior management personnel; restricting banks from making major expenses or creating any rights over assets, ordering banks to transfer assets or business, ordering major shareholders to supplement capital, ordering responsible shareholders or actual controllers to transfer equity or actual control or restricting their rights, etc.

• Notably, while the 2006 Law primarily targeted institutional-level violations, the Draft Amendment expands its regulatory radar to all shareholders and actual controllers of banks, which, if found to abuse their rights and violate the Draft Amendment, can be the subject of regulatory measures taken by NFRA.

Article 40 Where a banking financial institution is placed under take-over, restructuring, or is revoked, the banking   regulatory authority under the State Council has the power to require the directors, senior management personnel, and other employees of said institution to perform their duties in accordance with the requirements of the banking regulatory authority.

During the period of take-over, restructuring, or liquidation upon revocation, the following measures may be taken against the directly responsible directors, senior management, and other directly responsible personnel, subject to the approval of the responsible person of the banking regulatory authority under the State Council:

(1) Where the departure of directly responsible directors, senior management, or other directly responsible personnel from the country will cause significant loss to national interests, notice shall be sent to the exit control authorities to block their departure in accordance with the law;

(2) Apply to the judicial authorities to prohibit them from moving or transferring property, or from creating other rights over their property.

Article 63 Where a banking financial institution encounters major risks, the banking regulatory authority under the State Council has the power to require the directors, supervisors, senior management personnel, and other employees of said institution to perform their duties, in accordance with the requirements of the banking regulatory authority under the State Council.

Subject to the approval of the responsible person of the banking regulatory authority under the State Council, the following measures may be taken against the directly responsible directors, supervisors, senior management,  and other directly responsible personnel, as well as shareholders, actual controllers, and other institutions and personnel suspected of violating the law:

(1) Where their departure from the country will cause significant loss to national interests, notice shall be sent to the immigration management authorities to block their departure in accordance with the law;

(2) Apply to the judicial authorities to prohibit them from moving or transferring property, or from creating other rights over their property.

The Draft Amendment significantly enhances regulatory intervention capabilities and broadens the scope of personal accountability compared to the 2006 Law:

• Regarding the timing of intervention, the 2006 Law permits NFRA to step in during the take-over, restructuring, or liquidation of a bank, while the Draft Amendment permits the regulatory intervention as early as a major risk arises to a bank.

• In terms of the personnel subject to restrictive measures, the 2006 Law primarily targets directors, senior management, and other directly responsible personnel.  The Draft Amendment additionally subject   supervisors, shareholders, actual controllers, and other institutions or personnel suspected of violating the law to the same restrictive measures.

Failure by banks, major shareholders, or actual controllers of the banks to submit reports, statements, or required data.

Ordered to rectify; failure to rectify within the prescribed time limit or serious circumstances may result in a fine ranging from RMB 200,000 to RMB 2,000,000.

(1) Becoming major shareholders or actual controller of banks without regulatory approval;

(2) Failing to fulfill capital contribution obligations as shareholders of banks;

(3) Illegally entrusting others, or accepting entrustments, to hold equity in a bank;

(4) Major shareholders of banks failing to report equity-related information as required under Article 28 of the Draft Amendment;

(5) Banks, their shareholders and actual controllers, as well as the controlling shareholders and actual controllers of major shareholders, engaging in any prohibited conduct listed in the negative list under Article 29 of the Draft Amendment;

(6) Failing to cooperate with the bank in fulfilling prescribed information disclosure obligations;

(7) Major shareholders or actual controller of banks refusing to comply with regulatory measures under Article 51 of the Draft Amendment.

• Ordered to rectify; illegal gains shall be confiscated, and a fine of one to ten times the amount of the illegal gains may be imposed.  Where there are no illegal gains or the illegal gains are less than RMB 500,000, a fine ranging from RMB 500,000 to RMB 5,000,000 may be imposed.

• Where the circumstances are serious or rectification is not made within the prescribed time limit, the relevant shareholders may be ordered to return dividends distributed within a specified period.

• Responsible officers and other directly responsible personnel may be given a warning and fined RMB 50,000 to RMB 500,000.

This Legal Commentary has been prepared for clients and professional associates of Han Kun Law Offices. Whilst every effort has been made to ensure accuracy, no responsibility can be accepted for errors and omissions, however caused. The information contained in this publication should not be relied on as legal advice and should not be regarded as a substitute for detailed advice in individual cases.

If you have any questions regarding this publication, please contact:

Ting ZHENG

Tel:        +86 21 6080 0203

Email:   ting.zheng@hankunlaw.com