China Upgrades Rules On Recall Of Consumer Products.

China’s State Administration for Market Regulation (SAMR) recently unveiled new rules which beef up the consumer product recall regime in China.

 

The new rules are expected to provide stronger consumer protection against defective products in China, but will also increase the compliance obligations for manufacturers and distributors. They contain detailed operational rules and enhanced enforcement provisions which upgrade the existing regulatory framework. The new rules, entitled the Interim Rules on the Administration of Recall of Consumer Products (《消费品召回管理暂行规定》), will come into effect on 1 January 2020. In this bulletin we highlight some of the key aspects.

I. Scope of applicable products clarified

The new rules amend the definition of defect, which currently covers two circumstances:

 

(i) where the product fails to comply with the safety-related requirements set by national or industry-specific quality standards; or

 

(ii) where there is unreasonable danger in the product that will cause harm to health or damage to property. The difficulty with this definition is that the second circumstance is used much less frequently in practice in determining whether there is a defect as it is more difficult to measure than the first. This effectively results in the defect definition being translated into a much narrower question of whether a product complies with certain quality standards. Where no quality standards apply to a specific product, it is not uncommon for a product with a defect constituting unreasonable danger not to be recalled by the enforcing authority.

 

The new rules remove the first circumstance in determining whether a product contains a defect, retaining only the second. This means that, in determining product defects, companies and authorities should analyse and investigate the nature of the product rather than relying solely on quality standard compliance. The fact that a product complies with quality standards will not necessarily mean that the product is free from defects.

II. Reporting rules specified

The new rules reinforce existing reporting requirements on defective products. Specifically, both the manufacturer and those who distribute, repair or lease the products must report to the provincial regulatory authority if either:

 

(i) products are discovered to have caused or may cause death, serious personal injury or significant damage to property; or

 

(ii) products have been recalled outside China. A report must be made within two working days from the date it is discovered that either of these circumstances has occurred.

 

In addition, the manufacturer must immediately commence an investigation into the defective products. The provincial regulator may issue a notice to the manufacturer requiring it to commence an investigation if the authority discovers that products may be defective. The manufacturer must report the result of its investigation to the authority upon completion.

 

The new rules also clarify who is to be responsible for the recall of imported products. The overseas manufacturer may designate an entity to be responsible for the recall of any defective products in China and that designated entity will be regarded as the manufacturer of the defective product under the new recall rules. If no designation is made, the importer will be deemed as the manufacturer of the imported products.

 

In terms of the recall plan, the existing rules only specify the general principle that it should be comprehensive without providing any clear guidance as to what exactly should be included.

 

The new rules provide greater detail, requiring that at least the following information should be included:

 

(i) the scope of products to be recalled;

 

(ii) the defect discovered;

 

(iii) emergency measures to avoid damage;

 

(iv) details of recall measures;

 

(v) the name and contact details of the entity responsible for the recall; and (vi) the time schedule of recall measures.

 

Timing-wise, a manufacturer must report its recall plan to the regulatory authority within ten working days from the date the defect is identified or when the manufacturer is ordered by the authority to initiate the recall process. The recall must be announced to the general public within three working days thereafter. Additionally, the new rules impose specific timeframes for reporting updates once the recall plan is implemented. A manufacturer must submit to the authority periodic summary reports once every three months and submit a final summary report within fifteen working days after the recall process is completed.

III. Enforcement provisions enhanced

For the first time, the new rules set clear legal consequences for non-compliance. Manufacturers or other business operators may be ordered to make corrections within a specified time limit. If these are not made to the authority’s satisfaction within the time limit, a penalty of up to RMB 30,000 may be imposed. More importantly, the new rules require the authority to enter details of the recall order and penalty paid into China’s unified corporate social credit system, the National Enterprise Credit Information Publicity System.

 

A company in serious violation (such as a company refusing to cease the manufacture or sale of defective products, refusing to cooperate with the regulatory authority’s investigation or refusing to comply with a recall order) will be blacklisted as a dishonest enterprise. Dishonest enterprises face increased inspections by regulatory authorities, causing disruption to business operations, and will also find it more difficult to obtain or renew operation permits or enjoy preferential treatment. In addition, the reputational impact will be high for companies in the consumer sector as non-compliance information will be available to customers on the credit system’s website.

 

Our observations

 

The new rules are formulated against the backdrop of a reshuffle of China’s various administrative agencies, with the SAMR becoming a more powerful market regulator incorporating the functions of the former quality inspection authority responsible for enforcing product recall under the current regime. Once in force on 1 January 2020, the new rules are expected to provide stronger protection to Chinese consumers against defective products. However, the new rules will bring new compliance challenges for companies operating in, or selling products to, the China market.

 

The new recall rules cover all consumer products, set more specific and stringent reporting requirements and impose shorter time frames for companies to respond. This means that companies will need to act quickly and carefully in responding once a product defect is identified and will need to communicate effectively with the regulatory authority and the general public. Therefore, it is crucial for companies, with the help of professional advisors, to formulate an overall strategy and a detailed action roadmap for each step of the recall process (e.g. technical check as to whether a product fails into the scope of recall, the condition to return/refund, talking points during the communication with client). Companies also need to exercise extra care to ensure that product recalls in both overseas markets and the China market are conducted in a coordinated manner. Companies are advised to establish a solid internal response mechanism compatible with the new rules to avoid unnecessary penalties and reputational damages in one of the world’s largest consumer markets.