To curb the alarming growth of internet financial scams, China is aggressively pushing forth new regulations to control the rapidly growing fintech industry. 

In May, the People’s Bank of China, the country’s main financial regulator, set up a fintech committee to better monitor fintech players and meet their needs. 

“The committee is to address some loopholes,” says Xiao Sa, member of China Internet Finance Legal Research Association, who is also the lawyer for the first internet financial rating dispute in the country. “We see some players claiming that they are only internet technology providers, rather than internet finance operators, and try to develop new names to avoid supervision on some models such as P2P. The committee is adopting a broader concept to include all related business players and to oversee them, in whatever format, established or new.”

The committee is a recent move among a series of actions taken by the authorities to cope with the rapid development of artificial intelligence, social media and cloud computing, block chain technology and big data, reshaping the way the finance sector is operating.

China is now the world’s leader in fintech, accounting for nearly half of the global total in terms of market size. It is dominant in online lending, occupying about 75% of the global market. Alibaba’s Ant Financial, the largest Chinese fintech company, has been valued at about US$ 60bn, on par with UBS, Switzerland’s biggest bank. 

However, better regulations are called for after a number of scams were exposed. 

A P2P platform called Ezubao was caught bilking investors of US$7.6 billion by offering fake investment products since it established in 2014.

“We saw a bit of chaos when there was that overnight explosion, as there was a regulation vacuum, but our supervision bodies took action pretty fast,” says Wan Jun, a lawyer with Han Kun Law Office.

GUIDING OPINIONS 

In 2015, the People's Bank of China, Ministry of Industry and Information Technology, Ministry of Public Security, Ministry of Finance, State Administration for Industry and Commerce, State Council Legislative Affairs Office, China Banking Regulatory Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission, and State Internet Information Office jointly issued Guiding Opinions on Promoting the Healthy Development of Internet Finance (Yinfa [2015] No. 221). 

Experts see the opinions as a basic framework highlighting seven major internet financial sectors including internet payment, internet loans, equity crowd funding, internet fund sales, internet insurance, internet trust and internet consumer finance. It clarified the separate regulatory responsibilities over different models.

“It serves to fill gaps in existing regulations and as a guide for future legislation by specifying the definitions and boundaries of internet finance,” says Wan. “Tightening up is the trend in terms of regulation as there may be financial risk which may further lead to systematic risk.”

Following the general guidance, in 2016, the State Council issued the Implementation Plan of Rectification Work of Internet Financial Risks, and at the same time, the People’s Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission issued four major implementation guidelines on P2P internet lending, equity crowd funding, internet insurance and non-bank payment institutions. 

“The regulatory structure and implementation bodies are well established in the country. For example, regulations towards P2P now have been pretty clear,” says Xiao. “However, the main challenge with fintech is that the market is always moving at a faster pace; thus, we always see news things happening, which none of the existing rules precisely target.”

Wan echoes Xiao’s opinion and points out that “reward-based crowd funding, donation-based crowd funding and internet asset management related models still lack clear rules.”

HEDGING RISK

Tightening supervision is always seen as the fix to hedge risk. However, the way experts see fintech is that the challenge is ensuring better monitoring while allowing for a friendly regulatory environment that will not overreach and stifle the innovation in the sector. 

One reason behind the phenomenal growth of fintech in China is that it has an innovation-friendly environment whereas in many other countries, complicated regulations and approval systems discourage innovation. In Hong Kong, for example, the first batch of licenses were issued last August to five stored-value payment apps, including Alipay Wallet, Tap & Go, WeChat Pay, TNG Wallet and Octopus O! ePay.

“Finding a balance point is the biggest question here,” says Xiao. “The bigger picture here is still the encouragement for innovation. However, screening scams under the disguise of internet finance or whatever new format is the main task of regulators. The process takes time.”

The lawyer says that the regulators should not take action too fast as it is difficult to see any impact in the short term; however, if the regulations lag behind too much, then we might see risk emerging. 

Xiao uses cooking as a metaphor and says, “regulation is like the heating in cooking; the duration and degree should neither be too strong nor too weak, neither too long nor too short.”  

Nonetheless, there is a line that the regulators have set clearly that no operators can cross, which is the public fund. 

“The government has set a hard tone on controlling the utilization of money from the public. You can go as far as you want in innovation, but if the business is about to use the innovation to touch the money pool, you would meet very tight regulations,” says Wan.

Looking forward, both experts believe tightening of regulations will be seen in fintech, and the industry will be developed in a healthier and more sustainable way.

“In the US, where fintech started a bit earlier, there are only about ten P2P platforms now,” says Wan. “In some countries, we also see the government considering to open up for fintech companies.”

The Hong Kong Monetary Authority said that it will allow banks to experiment with new financial technologies that do not meet compliance standards, while the FCA (Financial Conduct Authority), the UK financial regulator, has already opened up for applications and successful ones can test new ideas for three to six months with real consumers under loosened regulations.

“In China, we see companies like Antfinance, which are backed by parent companies with strong financial backgrounds. They could be ideal candidates,” Wan suggests. 

Experts also call for regulators to adopt new technology in overseeing the dynamic fintech sector.

“The new fintech committee set up by the People's Bank of China is a good example of using high technology to regulate high technology related stuff. It said that it will adopt artificial intelligence to better monitor fintech players and meet their needs,” says Xiao.