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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As numerous democracies around the world prepare to vote in elections in 2024, legislators in some jurisdictions are putting in place measures to tackle electoral disinformation, while courts and regulators are also taking action.

The challenge of disinformation is significant given that falsehoods can spread quickly online. The problem has become more acute as technology has advanced and disinformation has become increasingly sophisticated. Certain content posted on social media, for example, is often not clearly false, but instead represents a distortion of the circumstances. ‘It deliberately plays with possible interpretations and the perception of polarising topics’, says Marc Hilber, Member of the IBA Technology Law Committee Advisory Board and a partner at Oppenhoff, Cologne.

Such content presents significant risks to electoral processes, undermining voters’ abilities to make informed decisions. This leads to political disengagement, particularly where individuals feel they’re unable to discern the truth. At a societal level, disinformation can erode public trust in institutions and the media, fostering scepticism about the credibility of democratic governance.

The EU’s Digital Services Act (DSA) aims to prevent illegal and harmful activities online, including the spread of disinformation. It came into effect in August for very large online platforms and online search engine providers of a similar size, and has applied to all intermediary service providers since mid-February – in time for the EU Parliament elections in early June. Included in the legislation is the requirement that online platforms and search engines with more than 45 million monthly average users and which have been designated by the European Commission must take measures against disinformation and election manipulation.

The DSA subjects those online service providers that are categorised as ‘very large’ to its most stringent obligations, requiring them to create mechanisms for users to report content they deem to be dubious or unlawful. When such content has been brought to the service provider’s attention by national regulatory authorities or courts, they’re required to remove it quickly and efficiently. Of particular note is that the DSA also requires designated platforms to analyse the systemic risks posed by their operations, particularly on civic discourse, the electoral process and public security, while ensuring that freedom of expression is protected.

Although the DSA doesn’t impose requirements on service providers to actively monitor content, it includes a type of provision – more typically found in US legislation – known as a ‘Good Samaritan’ clause. Through this, it offers an incentive to online intermediary services to carry out proactive monitoring activities, such as voluntary investigations, into illegal content by providing limitations to a service provider’s liability when it does so.

The European Commission has said that, since last August, the approach towards electoral integrity by those platforms that have been within the DSA’s remit has changed. The Commission highlights that providers are responding more quickly to content being flagged by local authorities and trusted partners, and clearer escalation processes for tackling disinformation and misinformation are now in place.

Martin Husovec, an associate professor of law at The London School of Economics and Political Science Law School, believes the DSA is sufficiently future-proofed to deal with election interference. He says that the key element, however, is that national law must also define when election interference takes place and create institutions that can assist platforms with understanding the local threats and context. ‘The DSA offers robust procedural tools once such acts are illegal, and fewer tools when such election interference is not illegal,’ he says. ‘The key obligation consists of timely and consistent removal of notified illegal content or conduct, which includes addressing inauthentic behaviour and similar coordinated attempts to influence elections.’ 

Political deepfakes – synthetic media digitally manipulated to replace an individual’s likeness convincingly with that of another, and which might therefore be used to spread electoral disinformation – and the malicious use of artificial intelligence (AI) appear to pose the greatest risk to elections at the current time. ‘It is becoming harder and harder to spot deepfakes, making it more difficult to distinguish what’s real and what’s not,’ says Robyn Mohr, a partner at Loeb & Loeb, in Washington, DC.

Deepfakes in particular have emerged as a major concern in the lead-up to the 2024 elections. In February, the US Federal Communications Commission (FCC) banned robocalls that use AI-generated voices. This was in response to a spate of deepfake robocalls impersonating President Joe Biden, which were being used to discourage people from voting in state presidential primaries.

Mohr commends the FCC for taking action so quickly. ‘My hope is that the FCC’s rule change serves as a signal that these types of behaviors have real consequences’, she says. ‘But, while a rule change is about as much as the FCC can do, I’m not sure it’s enough. Laws and rules are helpful, but industry also has a role to play here to help ensure their technologies are not being used in antidemocratic ways.’

Elsewhere the courts are becoming involved. For example, the Berlin Regional Court recently issued a temporary injunction prohibiting the publication of a deepfake video in which an audio track featuring an AI-generated voice was overlaid onto a speech by German Chancellor Olaf Scholz; this voiceover appears to announce that the German political party Alternative für Deutschland has been banned.

Sonia Cissé, a partner at Linklaters in Paris, highlights the relative ease and low cost of producing deepfakes. Their use in depicting politicians can lead to tarnished reputations and skewed public perception, she says, adding that ‘the proliferation of deepfakes could undermine the credibility of audiovisual media as a trusted source of information.’

An open letter, published on 21 February and signed by AI and tech industry experts, calls for further regulation of the creation of deepfakes given the potential risks to society, including elections. The statement recommends establishing criminal penalties for anyone who knowingly creates or facilitates the spread of harmful deepfakes, as well as legislating to require software developers and distributors to prevent their audiovisual products from creating them.

Tobias Kollakowski, a junior partner at Oppenhoff, says that laws and their enforcement can’t alone combat the spread of disinformation to manipulate elections, given that ‘technological change is faster than a generally lengthy legislative process.’ Additionally, Hilber adds, there must be international cooperation at government level, while there’s also a ‘need for international cooperation between companies, as was recently the case at the Munich Security Conference, where leading technology companies pledged to cooperate in recognising and combatting harmful AI content.’

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