China Update: Guidelines, Not Rules Quite Yet for Alternative Finance

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Crowdfund Insider | | May 11, 2016

Chinese flag2China is the largest market for alternative finance in the world. According to the Cambridge Centre for Alternative Finance (CCAF), China delivered over $100 billion in alternative finance, including peer to peer lending and crowdfunding, in 2015.  This was more than a 3X jump from 2014. An astounding number and incredible rate of growth. Yet this entire sector of finance has grown largely unregulated.

Chinese officials understand the strategic importance of providing access to capital for their economy and internet finance is the way forward. The fast-paced atmosphere has created a bit of a chaotic environment. While many reputable firms have risen to the top to provide a valued financial service, headlines have been peppered with acts of fraud and blatant incompetence by less respectable internet finance companies.  Ezubao, perhaps the best-known debacle, collapsed having fleeced billions from investors. Senior executives were promptly hauled away by Chinese police.  Allegedly 95% of the offers were considered fake.

During the past several months, Chinese officials have taken a more proactive approach by shutting down shady operations and coordinating investigations of poorly operated firms.  The political nuance to the entire ecosystem can be, at times, hard to decipher.  Recently Crowdfund Insider touched base with Spencer Li, an executive at Fincera (OTCQB: AUTCF), a publicly listed internet finance firm. Fincera wants to be the “Funding Circle” of China and they are well positioned to accomplish this goal.  Li, who is also a Crowdfund Insider contributor, provided some unique, inside perspective as to evolving sector of internet finance in China.

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Crowdfund Insider: Chinese officials have announced new guidelines regarding internet finance. Can you please explain their approach and what is (or is not) being enforced now?

Spencer Li: Ten ministries of the Chinese State Council jointly issued a set of guidelines for the internet finance industry in July 2015. These guidelines broadly covered the industry, including businesses involved in marketplace lending, equity or project crowdfunding, online investment fund sales, and online insurance sales. The overall tone of these guidelines was supportive of the industry but offered few specifics on how these businesses should be regulated.

Most importantly, the guidelines resulted in the central government delegating oversight responsibilities to the regulatory agencies and gave the order for these agencies to begin crafting specific policies. Oversight of marketplace lending platforms was assigned to the China Banking Regulatory Commission (CBRC), which issued an initial set of draft rules for public opinion in December 2015 that have yet to be finalized.

The policies outlined in the draft rules issued by the CBRC can be best described as “hands-off” because regulators did not choose to employ a license and permit system. Instead, the central government designated the oversight duties to local regulators at the provincial and municipal levels and provided them with guidelines. At the core of the draft document is a list of 12 rules that platforms cannot violate. You can find a detailed rundown on these rules and more in this January 2016 article that I authored.

As oversight and enforcement responsibilities have been assigned to local regulators, the level of enforcement action varies by region, and the central government is just beginning to organize local authorities to investigate and crack down on fraudulent platforms.

Crowdfund Insider: A recent headline stated “China Mulls Unprecedented Crackdown on P2P Lending Fraud”, what exactly does this mean?

Spencer Li: The article is referring to an internal meeting led by the Chinese central bank among relevant State Council ministries that resulted in the issuance of an action plan for provincial regulators to “manage risk” within the internet finance industry, namely to investigate and prosecute fraudulent platforms. The headline is misleading because the action plan document addresses multiple internet finance sectors including third-party payments, marketplace lending, equity crowdfunding, insurance sales, wealth management and more. The move was not targeted specifically at marketplace lending, but I imagine the majority of investigations will involve lending platforms due to their sheer numbers. The media may have labeled this move by the central government as “unprecedented” because we rarely see the State Council organizing enforcement action on a national level for a nascent industry at such a quick pace.

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Since the action plan is an internal government document, I haven’t been able to locate the original text. However, from media reports, the plan mandates a deadline of January 2017 for provincial regulators to complete 4 stages of enforcement work, including conducting investigations, enforcing the law and prosecuting offenders, evaluating enforcement progress, and inspecting results. To my knowledge, specific details on the 4 stages of the action plan have not been made available to the public, but the first stage is in process as platforms have begun receiving inquiry calls from local regulators seeking to get up to speed on the industry.

The big question here is that since the specific regulations on marketplace lending have yet to be finalized, what rules will local regulators rely on for enforcement action? This may be an indication that final rules will soon be announced, and local regulators are attempting to get a head start as many have not familiarized themselves with the internet finance industry. Nevertheless, since the primary focus is to crack down on financial frauds, there are sufficient laws in place to prosecute such cases.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support and networking opportunities to over 1300+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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