Advantages of mediation in securities investment disputes

Losses on investments in wealth management products are a common source of disputes between investors and firms that deal in securities and futures. In recent years, securities investment dispute cases have shown explosive growth, a trend that has continued unabated, even during the pandemic.

This growth is caused by a number of factors, but chief among them are:

(1) excessive innovation in financial products, multilevel nesting and unclear boundaries between rights and responsibilities;

(2) an immature investment culture with failure to achieve caveat vendor, caveat emptor; and

(3) financial institutions that have sales as their guiding light but lack awareness of risk control.

Even though authorities have issued a series of regulations to curb violations, the large volume of the existing business base combined with the economic downturn has meant that these measures have not reined in the explosive growth in legal cases. The relatively rapid growth in securities investment dispute cases has also put pressure on adjudication institutions, resulting in the current situation where the volume of work is enormous, resources are insufficient, adjudication efficiency is low, and there exists significant room for enhancing the predictability and appropriateness of adjudication outcomes.

It is worth noting that such disputes need not necessarily be resolved through litigation. During the pandemic, the authors resolved several disputes involving losses on investments in wealth management products through mediation.

Legal basis

Under the Mediation Rules of the China Securities Investor Services Centre, disputes between capital market entities in connection with securities, futures, funds and other such related business that fall within the scope accepted by the centre are:

(1) disputes between investors and listed companies;

(2) disputes between investors and firms dealing in securities and futures;

(3) disputes between investors and other capital market entities;

(4) disputes between investors; and

(5) other disputes that the centre deems it can accept.

On 20 November 2019, the Supreme People’s Court, the People’s Bank of China and the China Banking and Insurance Regulatory Commission jointly issued the Opinions on Comprehensively Promoting the Development of Diverse Mechanisms for the Settlement of Financial Disputes. These further clarify and emphasise the need to strengthen the development of a litigation and mediation linking mechanism that involves pre-litigation mediation, judicial confirmation, etc. for financial disputes.

The new Securities Law, which was implemented on 1 March 2020, provides that where a dispute arises between an investor and an issuer, securities company, etc., either party may apply to an investor protection institution for mediation. Where a securities related dispute arises between an ordinary investor and a securities company and the ordinary investor requests mediation, the securities company may not refuse the request.

The advantages

Mediation can play an important role in resolving securities investment disputes, having as it does the following advantages:

Efficient – streamlined procedure, quick dispute resolution

Low cost – in ordinary disputes, the parties can take part in mediation without the need to appoint an agent, reducing expenses compared with litigation and arbitration

Non-adversarial – mediation helps maintain the relationship between business partners

Quick – mediation agreements reached by the parties themselves are generally quickly performed

Judicial resources can be saved if parties can resolve a dispute through mediation. Also, diverse and efficient dispute resolution is of major advantage to commercial activities and helps to spark enterprise dynamism.

Proper enforcement

China has yet to establish a comprehensive enforcement and recognition procedure or, in general principle, to make mediation agreements enforceable. For now, the recognition of mediation agreements reached in relation to securities disputes is generally carried out by such means as mutual recognition on a case-by-case basis by the various institutions and local courts, joint assistance, etc.

Under the mediation rules, the agreement between parties is only of the nature of a civil contract and the centre has the right to track and revisit the performance of such an agreement, but the only means of monitoring available to it is its right to record the integrity information of the parties in accordance with the Measures for the Oversight of Integrity in the Securities and Futures Markets.

In order to make such commercial mediation agreements enforceable, the parties need to complete judicial confirmation, notarisation or arbitration in accordance with the relevant regulations. This is the only way that they can secure a judicial confirmation ruling or an enforceable notarial certificate or an arbitral award, and finally apply to a court for enforcement.

As for international mediation agreements, the issue of bringing the mainland legal system in line with international conventions is still to be resolved. China was among the first signatories to the UN Convention on International Settlement Agreements Resulting from Mediation – known as the Singapore Convention. However, the convention still needs to be ratified by the National People’s Congress.

Although commercial activities in China have always emphasised mediation to resolve disputes, there is no systematic legal regime for this, and even though China has the Arbitration Law, it is currently only secondary-level legislation, not to mention that legislative work on a more specific commercial mediation law has yet to commence.

To promote the development of a professionalised, market-oriented and internationalised commercial mediation service industry, it would be good for accredited investor service centres to incorporate in their mediation rules proven domestic and foreign experience and practices that are logical and self-consistent. This would provide more systematic and extensive practical materials for the system arrangements of a higher-level law, such as a future commercial mediation law.

Jeffery Quan is a senior partner and Wu Zhenyu is an associate at ETR Law Firm