Banks and financial services institutions in China will have to navigate through a drastically different regulatory regime following the country’s recent structural overhaul of its supervision system.

The ‘Year of the Dragon’ will see China’s newly established ‘super’ financial regulator, the National Financial Regulatory Administration (NFRA), flex its muscles. The NFRA was formed in May 2023, replacing the China Banking and Insurance Regulatory Commission (CBIRC). But it wasn’t until November that its responsibilities and structure were fully revealed.

Ireland went through a similar reform in 2003 and 2004, when it established a single multi-sector financial regulator. ‘The idea is to have a single regulator with the oversight of authorisation, prudential, conduct, corporate governance and other regulatory issues across different sectors, so there can be greater consistency and sophistication in the national financial regulator’s approaches and standards,’ explains Flynn, adding that the expectations for companies across these various sectors will also be similar.

For example, previously, the Chinese financial institutions involved in asset and wealth management, such as trust companies, insurance companies, banks and financial holding companies, were supervised by separate regulators. Under the new regime, they will be supervised by the NFRA’s asset and wealth management institution supervision department. ‘The reform enables the new regulator to […] better prevent business from profiting from possible regulatory arbitrage by institutions previously under different regulatory authorities,’ says Dorothy Xing, a banking and finance partner at Beijing-based law firm East & Concord.

Since its establishment, the NFRA has already published numerous sector-specific measures to strengthen the supervision of financial companies. These include interim measures for the supervisory rating of trust companies and rules on the risk management of banking and insurance institutions. ‘A common theme […] is the regulator’s increased focus and greater expectations on financial institutions’ corporate governance, risk control, operating rules and internal management. This is in line with other key legislative developments, such as the amendments to the Company Law,’ says Xing.

The past few years have seen more stringent enforcement from financial regulators in China. In 2023, the total value of fines issued for non-compliance and rule breaches by banks exceeded RMB2.8bn (£308.6m), according to Chinese media. Most enforcement actions relate to lending, corporate governance and internal control violations.

The financial regulatory reform will lead to higher requirements regarding compliance and risk control for domestic companies, as well as tougher enforcement actions being taken by the new regulator, says David Liu, Co-Chair of the IBA China Working Group and a partner at JunHe, based in Shanghai.

According to Liu, financial services compliance is already a rapidly growing area for Chinese law firms, and the rising level of fines resulting from non-compliance and rule violations – as well as the increasing number of new rules and measures issued by the NFRA – will drive up financial companies’ efforts on compliance, as well as their budget.

The central government has also announced policies to encourage banks to support the so-called ‘real economy’ and to lend to qualified property developers to ease the crisis in the property sector. Several other industries and initiatives have also been prioritised by the government for bank lending, such as green and low-carbon. ‘The policy mandates spurring banks to provide credit to stimulate the economy and support emerging but strategically important industries will require commercial banks to have more expertise in different areas and sectors when making lending decisions, as it is more difficult for them to identify eligible borrowers in these industries and effectively control risks,’ says Liu.

For example, when lending to startups in the field of new technologies, banks may need to rely on external expertise, such as lawyers who possess the relevant experience and who understand sectorial risks and intellectual property, in addition to traditional banking and finance lawyers. ‘To achieve the dual purposes of building a stable financial system and promoting lending to support the economy requires the new financial regulator to find an appropriate balance in its supervisory approach. If it regulates with a heavy hand, it may restrain banks’ development and lending activities, but a lax approach will lead to market disorder and financial risks. The balancing act will also largely depend on a large number of follow-on regulations and administrative measures that will show how these policies are being implemented in practice,’ says Liu.

Lawyers and their financial sector clients must embrace the new way of working, while the regulatory structural changes may affect the practice of law in certain areas. Given that different authorities have divergent review standards and processes, as well as varying approaches to the same issue, ‘lawyers should tailor legal documentation and the style of interaction accordingly,’ says Yuan Ting, a partner at Zhong Lun in Beijing.

The unified regulation of the domestic bond market is also an important part of the reforms. Previously, enterprise bonds, which were mostly issued by local government, were supervised by the National Development and Reform Commission, but in October 2023 they were placed under the CSRC’s supervision. ‘The recent consolidation of the regulatory responsibilities for enterprise bonds and corporate bonds will leads to necessary adjustments in relevant legal work,’ says Yuan.

Meanwhile, there are opportunities for foreign companies. The NFRA’s international department has recently published a document, confirming the regulator’s commitment to ‘promote high-level opening-up of the banking and insurance industries’. It has also relaxed the approval conditions for foreign institutions, including for the granting of insurance broker licences to foreign investors. At the local government level, there are also new measures and substantial incentives to encourage the establishment of foreign-invested financial institutions.

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