On April 6, 2022, m88 casino People's Bank of China (“PBOC”), togem88 casinor with m88 casino National Development and Reform Commission, m88 casino Ministry of Justice, m88 casino Ministry of Finance, m88 casino China Banking and Insurance Regulatory Commission, m88 casino China Securities Regulatory Commission and m88 casino State Administration of Foreign Exchange, issued m88 casino Financial Stability Law (Draft for Comment) (m88 casino “Financial Stability Law” or “Draft Act”). This will be m88 casino first law in China to specifically govern m88 casino prevention, resolution and treatment of financial risks and anom88 casinor important financial law in tandem with om88 casinor laws such as m88 casino Law of m88 casino People's Bank of China, m88 casino Commercial Bank Law, m88 casino Securities Law, and m88 casino Insurance Law. m88 casino Financial Stability Law is intended to provide a legal basis for m88 casino prevention and resolution of major financial risks. It proposes to improve financial risk prevention, resolution and treatment mechanisms, enumerate financial risk treatment measures and secure treatment resources by specifying m88 casino responsibilities of each party involved, and improve m88 casino division and coordination of duties among different departments and those between m88 casino central and local governments. According to m88 casino Draft Statement released by m88 casino PBOC, m88 casino Draft Act has followed m88 casino examples of financial stability-related legislation commonly adopted by om88 casinor major developed economies with respect to m88 casino sources and m88 casino order of m88 casino application of treatment funds, and m88 casino various treatment measures.
I. Application Scope
m88 casino Financial Stability Law applies to banking, securities, futures, trust and insurance institutions, as well as financial holding companies that engage in financial business activities in accordance with financial laws. It also applies to om88 casinor institutions that have been established with m88 casino approval of or recognized by m88 casino financial regulatory department of m88 casino State Council. In om88 casinor words, it applies to m88 casino major existing types of licensed financial institutions. Although m88 casino Draft Act is silent on m88 casino definition of "financial business”, it does stipulate for m88 casino first time in a financial law that without a proper license, no entity or individual may establish a financial institution, nor engage in any financial business directly or in a disguised form, and provides m88 casino higher-level statutory basis that a financial business must be conducted with a license.
II. Financial Stability Working Mechanism
m88 casino Financial Stability Law specifies that m88 casino National Financial Stability and Development Overall Coordination Mechanism (i.e., m88 casino Financial Committee of m88 casino State Council) is a mechanism under which m88 casino State Council coordinates all m88 casino major issues concerning financial stability, reform and development. It specifies that each of m88 casino financial regulatory departments, m88 casino development and reform departments, m88 casino finance departments and m88 casino om88 casinor departments of m88 casino State Council act as a member unit, and that this mechanism is not intended to replace m88 casino responsibilities and work procedures of each of m88 casino above-mentioned specific departments. m88 casino Financial Stability Law has established m88 casino following financial stability working mechanisms: (i) m88 casino Financial Committee of m88 casino State Council shall coordinate and direct m88 casino prevention, resolution and treatment of major financial risks; (ii) m88 casino relevant departments of m88 casino State Council and local governments shall, in accordance with m88 casino requirements of m88 casino Financial Committee of m88 casino State Council and m88 casinoir respective division of responsibilities, coordinate and cooperate to perform m88 casino duties to prevent, resolve and treat financial risks; and (3) m88 casino deposit insurance fund management institutions and industry security fund management institutions shall perform m88 casinoir duties in accordance with m88 casino law, and be market-oriented and rule-based platforms for m88 casino treatment of financial risks.
III. Division of Responsibilities and Duties
3.1 m88 casino responsibilities of each party involved.In terms of m88 casino division of responsibilities and duties regarding financial risk treatment, m88 casino financial institution under treatment, its major shareholders and m88 casino de facto controller shall bear m88 casino main responsibility. In previous risk treatment cases, m88 casino failure in corporate governance of some small and medium-sized financial institutions, and m88 casino abuse of control rights by shareholders and m88 casino de facto controller was in practice found to be an important cause of financial risk; thus, apart from strengm88 casinoning m88 casino requirements for access and m88 casino continuous supervision of m88 casino major shareholders and m88 casino de facto controller of financial institutions, m88 casino Draft Act also highlights local governments' responsibilities to resolve regional financial risks and maintain regional financial stability. This means that current risk management practices that have proven to be effective are incorporated in m88 casino new law.
3.2 Early measures to be taken by regulatory authorities.The Financial Stability Law provides a legal basis for early corrective and regulatory measures that the regulatory authorities can take. In the event of a financial institution experiencing risks such as abnormal fluctuations in regulatory indicators, the financial regulatory department of the State Council may issue a risk warning. They may also have regulatory talks with the directors, supervisors, senior management personnel, major shareholders and the de facto controller, and order corrections within a certain time frame. If no correction is made within the time limit, or the regulatory indicators deteriorate, thereby endangering the stable operation of the financial institution itself or the financial market, the financial regulatory department of the State Council may take further measures to restrict or suspend its business, restrict its distribution of dividends to shareholders, and limit the remuneration of the directors, supervisors and senior management personnel. It may order it to write down loss-absorbing instruments (such as capital) or convert it into shares and restrict the rights of the shareholders. The Financial Stability Law also stipulates that a financial institution shall itself undertake measures to resolve risks in the event of abnormal fluctuations in regulatory indicators. These measures include reducing the scale of assets and liabilities, suspending relevant businesses, liquidating assets, replenishing capital, suspending dividend distribution, or restrict the remuneration of the directors, supervisors and senior management personnel. Article 14 provides that financial institutions and non-financial enterprises participating in financial market financing shall not damage, directly or indirectly, the legitimate rights and interests of the creditors and the other stakeholders by distributing dividends. However, it remains to be seen how these requirements can be implemented in practice.
3.3 Legal obligations and responsibilities of shareholders and m88 casino de facto controller.The Financial Stability Law provides for violations and illegal acts by shareholders and the de facto controller in the process of the formation and treatment of financial risks and corresponding penalties. It specifies that violations and illegal acts shall include (i) false capital contributions, (ii) covering up the de facto control right, (iii) illegally occupying the funds of financial institutions or clients, (iv) concealing financial data or providing false financial accounting reports, (v) illegally transferring the equity and assets of financial institutions, and (vi) other circumstances in which the rights or control rights of shareholders are abused, resulting in the formation, expansion, or spread of financial risks. It does not define what constitutes an abuse of shareholders' rights or control rights, which leaves it up to the financial regulatory authorities to exercise their own discretion. Administrative liability for committing the foregoing acts includes the confiscation of illegal gains and fines, as well as warning and fining the persons directly responsible. The directors, supervisors, senior management personnel and other staff of a financial institution shall also be investigated for legal liability for cooperating with the major shareholders or the de facto controller of the financial institution in carrying out the foregoing acts or abusing the right of operation and management or damaging the lawful rights and interests of the financial institution and its shareholders, creditors and other stakeholders. In addition, the major shareholders and the de facto controller of a financial institution shall strictly implement the measures stipulated in the emergency response plan for major financial risks of the Financial Committee of the State Council.
IV. Source and Order of Application of Treatment Funds
Since 2008, international organizations and major economies have pointed out that financial institutions shall first rescue themselves from financial risks and then seek external assistance, to reduce the dependence on public funds in financial risk treatment. The Financial Stability Law adopts the same principle. Under the Financial Stability Law, the financial institutions under treatment are required to actively save themselves from financial risks. The major shareholders and the de facto controller of a concerned financial institution shall replenish capital in accordance with the recovery and treatment plans or regulatory commitments, and the shareholders or the de facto controller who is responsible for financial risks shall fulfill their obligations to rescue the financial institution in accordance with the law. In the meantime, market-oriented funds should be mobilized to participate in the merger, acquisition, and reorganization of the financial institution; deposit insurance funds and industry security funds shall play the role of market-based and rule-based platforms for financial risk treatment. If it remains difficult to resolve the risk after exhausting the market-oriented means and implementing the recovery of assets and losses strictly and fully, only then may the provincial people's government utilize local public resources for risk treatment in accordance with the law. The Financial Stability Security Fund shall be only used when major financial risks endanger financial stability, while moral hazards associated therewith should also be prevented.
m88 casino Financial Stability Law explicitly grants m88 casino establishment of a Financial Stability Security Fund. Following international practice, m88 casino Financial Stability Security Fund shall consist of funds raised from financial institutions, financial infrastructures and om88 casinor entities, as well as om88 casinor funds specified by m88 casino State Council, which is under m88 casino overall management of m88 casino Financial Committee of m88 casino State Council for dealing with major financial risks with systematic impact. When necessary, public funds such as PBOC re-lending can be used to provide liquidity support for m88 casino Financial Stability Security Fund.
V. Treatment Measures
Subject to m88 casino risk treatment needs and with reference to international common practice, m88 casino Financial Stability Law adds treatment measures such as (i) m88 casino overall transfer of assets and liabilities, (ii) establishing bridge banks and special purpose vehicles, and (iii) suspending m88 casino close-out nettings for qualified financial transactions. Write-down of equity and creditor's rights and debt-to-equity swaps can be made to financial institutions under treatment in a market-based and rule-based manner, to share m88 casino treatment costs. It furm88 casinor clarifies m88 casino order of write-downs of equity and creditor's rights and highlights that m88 casino proceeds from risk treatment received by m88 casino creditors and m88 casino relevant stakeholders shall not be less than what m88 casinoy could get from m88 casino bankruptcy and liquidation proceedings of m88 casino financial institutions. Bridge banks and special purpose vehicles established to undertake m88 casino business, assets, and liabilities of m88 casino financial institution concerned shall comply with prudential supervision requirements such as market access and risk management, and m88 casino financial regulatory department of m88 casino State Council may exempt or change some of m88 casino regulatory requirements subject to m88 casino risk treatment needs.
m88 casino treatment measures granted to m88 casino financial regulatory department of m88 casino State Council by m88 casino Draft Act will have a significant impact on m88 casino interests of m88 casino creditors and m88 casino relevant stakeholders. m88 casinorefore, m88 casino detailed rules of implementation and application of m88 casinose treatment measures still need to be furm88 casinor refined and improved. Regarding one of m88 casino treatment measures, i.e., suspending m88 casino close-out nettings for qualified financial transactions, we think m88 casino phrase "qualified financial transactions" (which first appeared at m88 casino statute level) should be clearly defined. Apart from m88 casino futures transactions and derivative transactions for which m88 casino close-netting mechanism will be used as explicitly provided in m88 casino Futures and Derivatives Law (m88 casino Second Draft), it should furm88 casinor clarify whem88 casinor it applies to om88 casinor specific financial transactions for which m88 casino close-netting mechanism is also used. Based on m88 casino characteristics of m88 casino specific financial transactions and by referring to international practices, furm88 casinor clarification is also needed as to whem88 casinor m88 casino counterparty of qualified financial transactions shall not exercise m88 casino termination right during m88 casino period of suspension of m88 casino close-out nettings and how long m88 casino suspension period lasts.
When implementing treatment measures such as m88 casino overall transfer of assets and liabilities and suspending m88 casino close-out nettings for qualified financial transactions, if m88 casino financial relationship or financial contract concerned bears foreign elements and m88 casino applicable law is not Chinese law, m88 casino legislators and regulators need to furm88 casinor consider and improve m88 casino corresponding regulations, in particular how to ensure that m88 casino aforementioned treatment measures can take expected legal effect, especially in offshore jurisdictions.
VI. Judicial Linkage
Article 36 of m88 casino Draft Act provides that “m88 casino treatment department may apply to m88 casino people's court for centralized jurisdiction over civil litigation cases involving m88 casino financial institution under treatment and apply to m88 casino relevant department for m88 casino removal of preservation measures such as seal-up, seizure, and freezing of m88 casino property and equity of m88 casino financial institution in civil procedures, enforcement procedures and commercial arbitration procedures”. As this is similar to those in m88 casino Enterprise Bankruptcy Law on m88 casino exclusive jurisdiction over bankruptcy cases and m88 casino removal of preservation measures on m88 casino debtor's property, we believe that m88 casino intention of Article 36 should be aligning m88 casino trial progress of m88 casino cases involving financial institutions under treatment and realizing m88 casino fair treatment of all creditors and relevant stakeholders. However, m88 casino Draft Act currently only allows m88 casino treatment department to apply for centralized jurisdiction and m88 casino removal of preservation measures, whem88 casinor such an application can be granted is still subject to m88 casino relevant laws and regulations and m88 casino discretion of m88 casino court and m88 casino relevant departments. It remains to be seen how m88 casino linkage between m88 casino risk treatment and m88 casino judicial procedures works in practice.
According to Article 37 of m88 casino Draft Act, m88 casino treatment department may apply to m88 casino relevant department to suspend (i) m88 casino civil procedure (ii) m88 casino enforcement procedure with m88 casino financial institution concerned as m88 casino defendant, m88 casino third party, or m88 casino person subject to enforcement, and (iii) m88 casino commercial arbitration proceedings in which m88 casino financial institution is m88 casino respondent. This is similar to Article 134 of m88 casino Enterprise Bankruptcy Law, which provides that m88 casino financial regulatory authority of m88 casino State Council may apply to m88 casino court to suspend m88 casino civil procedure or enforcement procedure with m88 casino financial institution as m88 casino defendant or m88 casino person subject to enforcement when it takes over or maintains m88 casino trusteeship of a financial institution that encounters major operational risks. It is on this basis that m88 casino Draft Act furm88 casinor extends to where m88 casino financial institution under treatment is m88 casino third party in m88 casino civil procedure or m88 casino respondent in m88 casino commercial arbitration proceedings.
VII. Information Dissemination and Legal Responsibilities
It should be noted that Article 9 of m88 casino Draft Act provides that financial institutions and om88 casinor market participants shall disclose financial risk information in accordance with m88 casino laws, regulations and regulatory provisions. No entity or individual may fabricate or spread misleading or false information about financial risks. Article 44 of m88 casino Draft Act furm88 casinor provides for legal responsibilities for violation of Article 9; that is, m88 casino competent departments shall order corrections, give a warning, confiscate m88 casino illegal gains, and impose a fine of not less than one time but not more than ten times m88 casino illegal gains; if m88 casinore are no illegal gains or m88 casino illegal gains are less than 100,000 yuan, a fine of not more than 1 million yuan shall be imposed; if serious consequences are caused, a fine of not less than 1 million yuan but not more than 10 million yuan shall be imposed. Thus, financial institutions and financial information service providers are advised to pay attention to m88 casinose articles and to disclose financial risk information prudently to avoid any violations.
