I. Key Points of the Reform Plan
1.1 Division of the Functions of the Central Financial Regulatory Authorities
On March 10, 2023, the first session of the 14th National People’s Congress approved reformation plans to reorganize the top financial regulatory bodies under the State Council (the “Reform Plan”). The most notable aim of the Reform Plan is to set up a new national financial regulatory body called the National Financial Regulatory Administration (NFRA), which would replace the China Banking and Insurance Regulatory Commission (CBIRC). A new framework would be established, whereby the NFRA would ultimately supervise all financial sectors except for the securities sector, the People’s Bank of China (PBOC) would focus on macro-prudential regulations and monetary policies and would not perform the micro financial regulation functions, and the China Securities Regulatory Commission (CSRC) would be retained and continue to regulate the securities sector.
1.2 Financial Regulatory Principles
The Reform Plan highlights five key principles to strengthen financial regulation, i.e. (i) regulation by institutional type, (ii) regulation by activity, (iii) regulation by function, (iv) regulation by looking-through, and (v) regulation on an ongoing basis. These regulatory principles have been reflected in the specific reform plans. In the past, regulation by institutional type has been a prevailing principle, but now the authorities attach equal importance on regulation by institutional type and the other four principles, which demonstrates the policymakers’ focus of this reform, specifically, (1) the highlights of the principles of regulation by function, regulation by looking-through, and regulation on an ongoing basis underscore the need to prevent financial risk by promoting integrated financial regulation to eliminate any regulatory arbitrage. This is reflected in the Reform Plan, that is, the PBOC’s duty of supervising financial holding companies and other financial groups would be transferred to the NFRA, and the CSRC would take over the approval power related to enterprise bond issuance; (2) the principle of regulation by activity reflects the focus of law enforcement against violations and illegal acts. This is also reflected in the Reform Plan, that is, the PBOC’s duties of protecting financial consumers and the CSRC’s duties of protecting investors would be both transferred to the NFRA. All these reforms indicate that the NFRA may have the authorization to establish an overall framework on financial consumer protection. It also indicates that a streamlined regime may be established, whereby the NFRA will promote the legislation and law enforcement against illegal financial activities that may arise across various financial sectors.
1.3 Regional Financial Regulation
It is important to note the division of the financial regulation responsibilities and powers between central and local governments. Spinning off the local financial regulatory authorities’ responsibilities for promoting the local financial business development, local financial regulatory authorities shall focus more on financial regulation, which underlines the policymakers’ emphasis on strengthening financial risk prevention and local governments’ own territorial responsibilities to guard against financial risks.
II. Ongoing Reforms
Undoubtedly, the focus of this round of reforms lies in strengthening financial regulation to prevent financial risks. Though the focus of the financial reform is evident, the finer details and the implementation roadmap are yet to be clarified. For example, it remains to be seen how the NFRA would perform its functions for financial consumer protection and how the NFRA would enhance the law-making and law enforcement for financial consumer protection. We believe that China’s financial reforms will be ongoing and evolving in the foreseeable future, with different emphasis on certain aspects in different phases, reflecting a flexible and pragmatic approach adopted by the Chinese government. Foreign institutions are advised to pay close attention to the establishment of the NFRA as well as the implementation of the reform plans, particularly any further legislative and law enforcement developments in financial consumer protection.