.jpg)
17 January, 2018
Introduction
The China Banking Regulatory Commission (“CBRC”), in the latest of a series of moves by the Chinese government to open up the financial sector and reduce regulatory restrictions for foreign investors, has published draft revisions to its 2015 rules on administrative licensing matters relating to foreign-funded banks. The scope of the draft revisions is wide-ranging, and covers investment in domestic banks, licensing requirements and other operational matters.
The draft is open for public comments until 27 January 2018. We consider the proposed changes below.
Investment in domestic banking institutions……
The draft proposes to introduce details of the conditions, procedures, and application requirements for wholly foreign-owned and Sino-foreign joint venture banks (“Locally Incorporated Foreign Banks”) to set up, or buy into, other banking entities in China. The changes are intended to function as detailed implementing rules to CBRC’s March 2017 notice, which permitted, for the first time, Locally Incorporated Foreign Banks to invest in other banking entities in China (see our earlier alert).
…… by Locally Incorporated Foreign Banks on equal footing with Chinese-funded banks
It is proposed that the same prudential criteria and application requirements, as well as the same six-month approval timeline, will apply to both a Locally Incorporated Foreign Bank and a Chinese-funded bank seeking to set up, or invest in, a banking entity in China. The Schedule to this alert gives details of the proposed requirements.
An exception to the above principle is provided in that, if a Locally Incorporated Foreign Bank makes an investment as a promoter of a newly-established Chinese-funded bank or a strategic investor, the rules applicable to overseas financial institutions in Chinese-funded banks are proposed to apply by reference. These rules, as of now, include the applicable foreign ownership
caps (being 20 per cent. for a single overseas financial institution, and 25 per cent. for the collective shareholding of multiple overseas financial institutions in a single Chinese-funded bank). Full realisation of the principle of equal treatment for Locally Incorporated Foreign Banks and Chinese-funded banks investing in Chinese banking entities requires further detail of how, and when, these caps are to be further liberalised (as mentioned in an interview given by Vice Finance Minister Zhu Guangyao in November 2017) and revision to other related CBRC rules.
Eliminating approval requirements
The draft proposes to remove the CBRC approval requirements in the following areas. It is expected that Locally Incorporated Foreign Banks and branches of foreign banks in China will need to report to the regulators within 5 days after they start to provide the relevant services.
- Locally Incorporated Foreign Banks providing securities investment fund custody services – whilst this change would bring the CBRC regulatory position of Locally Incorporated Foreign Banks into line with Chinese-funded banks, it should be noted that the approval of the China Securities Regulatory Commission (“CSRC”) is still required to provide these services.
- Locally Incorporated Foreign Banks and branches of foreign banks in China providing overseas wealth management services on behalf of clients (i.e. QDII services) – whether this change entirely removes the CBRC approval requirements remains to be seen, as the QDII rules themselves, which are unchanged by the draft, contain provisions requiring both foreign and Chinese-funded banks to obtain CBRC approval in order to provide QDII services. In any event, the ability to provide QDII services may still be controlled by the State Administration of Foreign Exchange (“SAFE”), as the requisite quotas have not been granted by SAFE since April 2015.
- Locally Incorporated Foreign Banks and branches of foreign banks in China providing QDII custody services on behalf of clients – note that under the present rules, an applicant is already exempt from obtaining CBRC approval if it is licensed to provide securities investment fund custody services.
Withdrawal of interest-bearing assets
The current rules require foreign bank branches in China to maintain a minimum of 30 per cent. of their operating funds in the form of interest-bearing assets with Chinese-funded banks. The draft proposes, when a foreign bank branch has already been approved by the CBRC to be closed, to abolish the requirement for the closed branch to obtain a further CBRC approval in order to withdraw these assets.
Facilitating the establishment of sub-branches
The draft proposes to merge the two-stage approval process, of preparation for establishment and business commencement, which a Locally Incorporated Foreign Bank currently needs to go through in order to establish a sub-branch. Under the proposals (which seek to place Locally Incorporated Foreign Banks on the same footing as Chinese-funded banks), CBRC approval is only required to be obtained before the sub-branch commences business, and no separate approval of preparation for establishment will be required. Instead, the applicant will be required to submit a report to the CBRC and complete the process of preparation for establishment within 9 months of submitting the report.
Other business improvements
The condition that a Locally Incorporated Foreign Bank raising debt or supplementary capital instruments must not have had in the previous three years any record of material violation, or major incidents arising from internal management failures, is proposed to be removed. This brings the eligibility criteria for such issuances into line with Chinese-funded banks. Also proposed to be removed is the requirement to obtain a legal opinion from a Chinese law firm.
The proposals also seek to facilitate job mobility among Locally Incorporated Foreign Banks. Under the draft, senior management personnel of a Locally Incorporated Foreign Bank who wish to take up a parallel or lower position in another Locally Incorporated Foreign Bank of the same nature and type no longer need to re-apply to the CBRC for approval of their qualification with the new employer. Instead, the candidate will be required to file with the CBRC, or its local office, within five days of acceding to the new position.
Overall assessment
The focus of the draft revisions has been on the government’s initiative to create a level playing field for foreign and Chinese-funded banks (as foreshadowed in our earlier alert). Locally Incorporated Foreign Banks will welcome the opportunity to build out their networks of sub-branches in accordance with a more streamlined approval roadmap. They will also appreciate the general convergence of CBRC requirements with their Chinese-funded counterparts in a variety of services, although the cooperation of CSRC and SAFE and, possibly, further revision to the rules in a number of areas is still required. While the overall pace and direction of the proposed regulatory change has been positive, other reforms promised in 2017, such as relaxation of RMB business eligibility requirements and removal of foreign investment caps in Chinese-funded banks (see our earlier alerts here and here) have yet to be rolled out.
Reference
CBRC Seeks Opinions on Revised Implementing Measures for Administrative Licensing Matters Relating to Foreign-funded Banks 银监会就修改《外资银行行政许可事项实施办法》征求意见, 28 December 2017
For further information, please contact:
Jian Fang, Partner, Linklaters
jian.fang@linklaters.com
