Blog: A Brief Study On Financial Regulatory Mechanism Reform Plan … – Mondaq News Alerts

Premier Li Keqiang submitted the China’s State Council
Institution Reform Plan (Hereinafter referred to as Reform Plan)
which was formed in accordance with the Communist Party of
China (CPC) and State Institution Reform Plan, to the First
Session of the 14th National People’s Congress for deliberation
on March 7, 2023; National People’s Congress approved
the Reform Plan on March 10, 2023. Among them the
relevant content of the establishment of the National Financial
Regulatory Administration became the dominant topic in the
financial industry. According to the Reform Plan, the National
Financial Regulatory Administration will be unified and
responsible for the supervision of the financial industry except
for the securities industry, strengthening institutional
supervision, conduct supervision, functional supervision,
penetrating supervision and continuous supervision, and
coordinating the protection of the rights and interests of
financial consumers and other matters. The financial regulatory
mechanism reform is wide-ranging, far-reaching and
attention-grabbing. This article briefly reviews the
evolution of financial supervision and management mechanism in
China, and briefly analyzes and outlooks the challenges that will
be brought by this reform.

I. Brief Review of the Evolution of the Financial
Regulatory System

Upon the completion of the financial regulatory mechanism
reform, China’s “One Bank, Two Commissions and One
Committee” regulatory model will become history, replaced by
the new regulatory model of “One Bank, One Bureau, One
Commission and One Committee”. In fact, the financial
regulatory reform is not an overnight matter. As early as years
ago, many experts and scholars have put forward the concept of
unified supervision and demonstrated it in detail.

Figure 1 Evolution of China’s financial regulatory
system

Looking back at the reform of China’s financial regulatory
mechanism, it can be summarized as a process from integration to
division, and then from division to integration again. Before the
reform and opening up, the financial supervision of China is
unified and highly centralized by the People’s Bank of China
(PBOC). After the reform and opening up, various financial entities
were established one after another with the development of market
economy. In order to optimize the regulatory mechanism, the China
Securities Regulatory Commission (CSRC), the China Insurance
Regulatory Commission (CIRC) and the China Banking Regulatory
Commission (CBRC) were established one after another, forming the
regulatory mechanism of “One Bank and Three Commissions”
in China. In 2017, with the establishment of the State
Council’s Financial Stability and Development Committee and the
subsequent merger of the CBRC and the CIRC to form the China
Banking and Insurance Regulatory Commission (CBIRC), the new
structure of “One Bank, Two Commissions and One
Committee” was established and has been used up till now. The
Reform Plan proposed the “One Bank, One Bureau, One Commission
and One Committee” regulatory framework, “One bank”
refers to the PBOC, “One bureau” refers to the new
National Financial Regulatory Administration, “One
Commission” refers to the CSRC, “One Committee”
refers to the State Council’s Financial Stability and
Development Committee.

Figure 2 The structure chart of “One Bank, One Bureau, One
Commission and One Committee”

From “One Bank and Three Commissions” to “One
Bank, Two Commissions and One Committee” to “One Bank,
One Bureau, One Commission and One Committee commission”,
“big supervision” model is gradually implemented. Xi
Jinping, general secretary of the Communist Party of China Central
Committee, pointed out in the report of the 20th CPC
Congress ”Deepen the reform of the financial mechanism,
build a modern central banking mechanism, strengthen and improve
modern financial supervision, strengthen the financial stability
protection mechanism, bring all types of financial activities under
supervision in accordance with the law, and ensure the bottom line
of no systemic risk.” Guo Shuqing, party secretary of the PBOC
and chairman of the CBIRC, expressed earlier this
year ”The general requirement for deepening the reform of
the financial mechanism is to strengthen the centralized and
unified leadership of the CPC Central Committee on financial work.
Specifically,……strengthen and improve modern financial
supervision, establish a sound coordination mechanism for financial
stability and development, and strengthen the financial stability
protection mechanism…….” Thus, it can be seen that this
reform of the financial regulatory mechanism is in line with the
guiding spirit of the 20th CPC Congress, and is a specific
initiative to strengthen and improve modern financial
supervision.

Overall, the reform of the financial regulatory mechanism has
given the National Financial Regulatory Administration more
comprehensive responsibilities than the CBIRC, which is unified and
responsible for the supervision of the financial sector except for
the securities industry. Bringing all financial sectors under
unified supervision will help eliminate regulatory blind spots and
differences, and further improve the efficiency and quality of
supervision.

II. Challenges to the reform of the financial regulatory
system

This reform of the financial regulatory mechanism covers a wide
range of areas and brings many challenges as well.

1 Integration of regulatory mechanism

The National Financial Regulatory Administration was established
on the basis of the CBIRC and received some of the
functions from the PBOC and the CSRC. How to organize and
integrate the relevant mechanisms introduced by the three
regulators, how to smoothly carry out the transition and how to
retroactively address the issues in the implementation process are
yet to be resolved. For example, financial consumer protection and
investor protection currently adopt the parallel mechanisms of the
CBIRC and the CSRC, with differences in penalty mechanisms and
penalty intensity. It is worth paying attention to whether
relevant mechanisms will be integrated and protection standards
will be unified after the implementation of the Reform Plan.

2 Adjustment of institutional structure

In terms of the reform of the branches of the PBOC, the smooth
connection of the relevant business is also a challenge since the
county-level branches will be cancelled. In addition, the Reform
Plan only mentions the use of administrative staffing for the State
Administration of Foreign Exchange (SAFE), and does not involve its
institutional adjustment. If the branches of the SAFE will not
be adjusted, there will be no county-level branch of the PBOC while
the SAFE has a county-level branch. In this case, it remains to be
seen whether the staffing and institutional functions of the SAFE
branch will be adjusted accordingly.

3 Cross-departmental coordination

In this Reform Plan, the CSRC will be responsible for the review
of corporate bond issuance formerly under the National Development
and Reform Commission (NDRC), that is, the CSRC will be
responsible for the review of company (enterprise) bond issuance.
It is also urgent to formulate specific policies and transition
plans on how to link up relevant documents and projects for the
review of bond issuance. In addition, the registration of
foreign debts, which is the responsibility of the NDRC, is not
mentioned in the Reform Plan. Therefore, the recently implemented
the Measures for the Examination and Registration of Medium and
Long-term Foreign Debts of Enterprises (Order No.56 of the NDRC)
(Document No.56) should theoretically be unaffected by the Reform
Plan and will continue to be conducted by the NDRC. However, in the
context of the adjustment of the review responsibility of the
company (enterprise) bonds issuance, whether Document No.56
will be improved accordingly remains to be observed in
practice.

4 Local financial supervision starts again

The Reform Plan proposes to deepen the reform of the local
financial regulatory mechanism explicitly, to establish
the local financial regulatory mechanism based on the local
dispatch agencies of the central financial administration, and
requires the local government to set up financial regulatory
agencies dedicated to regulatory responsibilities expressly. On the
one hand, the new local financial supervision mechanism has
established the main role of the local dispatched offices of the
central financial management departments, on the other hand, it
will also change the current problem of overlap between local
financial regulators and local financial offices (financial
bureaus), showing the determination and basic ideas of China in the
reform of local financial supervision.

5 Specific business regulation

This Reform Plan should have less impact on the regulatory
mechanism of specific businesses such as funds, trusts, wealth
management, asset management, leasing and insurance, but whether
the regulatory mechanism of various businesses within the National
Financial Regulatory Administration will be reformed simultaneously
is yet to be clarified. In addition, whether the relevant laws and
regulations will be further sorted out and integrated also needs to
be clarified. For example, the CBIRC consolidated the related
regulations of the former CBRC and the former CIRC, and implemented
the Measures for the Administration of Related Transactions of
Banking and Insurance Institutions (CBIRC
Order〔2022〕No.1) in 2022, while the PBOC’s
Measures for the Administration of Related Transactions of
Financial Holding Companies (PBOC
Order〔2023〕No.1) was just released and implemented
this year. After this reform, it is yet to be clarified how the
financial holding companies will manage their connected
transactions and whether they will further start from integrating
the regulations. In addition, as the penetrating regulation and
conduct regulation requirements, which have been mentioned many
times in recent years in financial regulation, are also mentioned
in this reform proposal, Therefore, it is believed that the
effective implementation of such regulatory requirements at the
specific business level will continue to be an important focus of
specific business regulation.

6 Maintaining financial stability is still on the
way

The Reform Plan does not mention the State Council’s
Financial Stability and Development Committee, but its status and
role in maintaining financial stability is precisely the most
important. As the deliberative and coordinating institution of
the State Council to coordinate major issues concerning financial
stability and reform and development, its responsibilities includes
implementing the decisions and arrangements of the CPC Central
Committee and the State Council on financial work, reviewing the
major plans for financial reform and development, coordinating the
major issues of financial supervision, studying the major policies
of preventing and handling systemic financial risks; guiding the
local financial reform, development and supervision, etc. Under the
financial regulatory mechanism described in the Reform Plan, the
State Council’s Financial Stability and Development Committee
continues to play a key role in coordinating macro and micro
regulatory policies and effectively guiding the financial sector to
serve the real economy. Considering that the Financial Stability
Law (draft) was solicited last year, the implementation of the
financial stability mechanism is already expected. In the future,
under the framework of the Financial Stability Law, the “One
Committee” will coordinate with “One bank, One Bureau and
One Commission” and local financial regulators and give full
play to their role in maintaining financial stability, which will
be both challenging and promising.

Reform is a universal truth. The content of financial
supervision mechanism in the Reform Plan is the reform according to
the current situation of financial development and the need of
financial supervision, and conforms to the development of the
times. At the same time, reform will bring challenges, and
reform can be achieved only when challenges are solved. We
will continuously focus on the latest trends of the reform of the
financial regulatory mechanism, and will make further analysis and
interpretation in due course.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.