After a period of rapid growth, strong fintech regulation is on the rise in China. The scale of third-party payments has increased from 13 trillion RMB in 2013 to 300 trillion RMB in 2019, while internet wealth management has grown from less than 1 trillion RMB in 2013 to over 5.5 trillion RMB in 2018. However, some fintech firms have engaged in improper activities, using financial instruments such as P2P lending, microfinance, and asset-backed securities. This has allowed them to achieve excessive leverage or even fraud, creating systemic risks. Indeed, China’s 2020 Government Work Report stated that the supervision of fintech firms is necessary to ensure that innovation occurs under proper regulation.
Chinese regulatory bodies are solidly behind the move to more tightly regulate fintech. Last week, the chairman of the China Banking and Insurance Regulatory Commission (CBIRC), Guo Shuqing, stated that fintech companies must meet capital adequacy requirements and should not be given special treatment within the financial sector. Regulations on bank internet loans require a minimum capital contribution and state that internet banks must be regulated in line with financial regulations. This transition must occur within two years. The CBIRC has also required small and medium-sized banks and others to refrain from making cross-regional internet loans.
Ant Financial was the most recent large firm to feel the weight of the regulatory crackdown. The company’s IPO was halted in November last year due to regulators’ announcement of additional regulations to raise standards for online lending as well as company structure. To comply with new capital requirements, Ant Group is in the process of restructuring. On a positive note, Guo has stated that there are no restrictions on Ant’s financial business except for legal compliance.
More regulations can be expected within the next five to 10 years as fintech continues to grow. The 14th Five-Year Plan underscores that China will use technological innovation to drive development and calls specifically for ongoing research and development of the central bank digital currency. During the plan period, more attention will be given to the use of fintech for financial inclusion and green finance. The plan also emphasizes the need for further antitrust and licensing rules for tech platforms and for new fintech regulations.
The strongest voices calling for further fintech regulation demand greater data security and privacy protection within the sector. Government and non-government experts have asserted that large internet firms have become “information islands,” obtaining large amounts of information without increasing people’s access to information services. Such experts believe that shared information can improve social efficiency, particularly in extreme cases, such as the COVID-19 epidemic. Shared information can also provide public data to enhance government capabilities and improve public services.
At the same time, Chinese experts have also asserted the need for improving personal data privacy rights and safeguarding national data security. The idea is that data must be separated according to its necessary control and privacy risks. While China’s legislature has already passed a Civil Code to generally protect individual consumers’ data, there remains a great deal of concern about what type of data exits the country and how cross-border data flows can be properly managed. Some technology experts have even recommended that a national data bank be established and run by a special agency in order to properly collect, store, and transmit data.
Some government researchers have requested that other types of fintech regulation be put into place in order to better control loan funds and improve the credit investigation environment. Last month, the People’s Bank of China issued the “Measures for the Management of Credit Investigation Services (Draft for Comment),” which would prevent credit collection firms from collecting information from illegal channels or through deceptive means, collecting fees from individuals or firms, or otherwise violating the rights of the information subjects. Currently, there are credit investigation companies that have questionable credit collection, storage, and use practices. The current draft regulations follow two previous rules on credit reporting institutions and may be followed by additional rules.
As more fintech regulations are put into place, it will be difficult to allow breathing room for fintech innovations to grow. After all, even fintech firms that have worked closely with regulators to ensure compliance with upcoming regulations have been confronted with new rules that quash much of their business. In the tightening financial regulatory environment, fintech firms can aim to be as compliant with future rules as possible and hope for the best.