The “internet+” boom sweeping through various economic sectors in China in recent years has driven new business models, including online car booking, car sharing and bike sharing services, to emerge and prosper in the transport sector. In practice, operators of these models usually receive collaterals (security deposits) and prepayments (collectively, user funds) and other applicable sums from users. However, there are no explicit provisions for compliance with how the operators may collect, use and return user funds. Several years have gone by since these services were launched, and the sector is raising red flags concerning, for example, improper use of user funds, inadequate risk control, and difficulties in refunding, which may prejudice legitimate rights and interests of users and lead to risks. To address these problems, recently, the National Development and Reform Commission, the State Administration for Market Regulation and four other authorities jointly issued the Measures for the Administration of User Funds of New Transport Service Models (for Trial Implementation). The following are highlights of the measures.
Scope of user funds
User funds include collaterals (security deposits) and prepayments that users pay in order to receive services from operators. The Measures encourage operators to provide services without receiving collaterals or prepayments from users – they are in favour of the idea that operators should directly charge fees from users upon the termination of services. However, the Measures do not prohibit operators from receiving user funds.
Limits and proportion
With respect to user collaterals, the Measures stipulate that: (i) in relation to car sharing service, the amount of collateral per unit shall not exceed 2% of the average cost per car of all cars put into operation; and (ii) in relation to bike sharing service, the amount of collateral per unit shall not exceed 10% of the average cost per bike of all bikes put into operation.
As far as user prepayments are concerned, the amount of prepayment under any single account of a shared bicycle user shall not exceed RMB100. For any other new transport service model, the amount of prepayment under any single account shall not exceed RMB8,000, in the case of an individual user, or RMB30,000, in the case of an institutional user.
(1) Kept in safe custody in a dedicated deposit account: After completing filing procedures with the administrative authority in charge of new transport service models in the operator’s place of incorporation, the operator may open only one special deposit custody account (used exclusively for depositing user collaterals and prepayments) with only one custodian bank. At his/her discretion, each user may choose to have his/her user collateral kept in custody in the operator’s dedicated saving account or in the user’s personal bank settlement account.
(2) Assurance of refund:
- In connection with user collaterals, operators should ensure that service agreements signed with users specify the amounts to be charged as collaterals, and the conditions for making deductions from collaterals. They should also ensure that a clear notice on the method, procedure and period for getting refund of collaterals is posted in a conspicuous position in their online platforms. Where an operator uses a dedicated savings account to deposit user collaterals, it should work with the custodian bank or any other payment service providers (as the case may be) to establish an emergency mechanism for ensuring refund of user collaterals in special situations, where a disproportionately large number of refund requests are received at the same time or refunds cannot be made in the agreed period of time. If necessary, the operator should advance the user collaterals out-of-pocket.
- In connection with user prepayments, operators should specify the conditions for refund of prepayments. If the refund conditions are met, operators should refund the balance of prepayments to users without delay. Operators must not decline or delay refunds or impose any unfair or unreasonable standard terms or technical thresholds. In addition, operators should establish a system and maintain reserves with respect to user prepayments. The amount of reserves shall not be less than 40% of the balance of user prepayments.
(3) Use of user funds:
- Deduction from user collaterals: Deductions from collaterals shall be made in accordance with the deduction conditions specified in the service agreements between operators and users; and
- Use of user prepayments: User prepayments shall be used solely for the purposes of the operator’s primary business in connection with the services provided to the users. Using user prepayments for investments or loans involving real estate, equities, securities or bonds is prohibited.
(4) Fruits of user funds: Operators and users may specify the ownership of fruits of user funds by agreements.
(5) Duties and responsibilities of custodian banks: Custodian banks shall perform certain duties and responsibilities, including without limitation, opening, changing and cancelling dedicated saving accounts, keeping user funds in safe custody, providing clearing and account checking services for user funds, and providing user fund custody reports, in accordance with the relevant laws, regulations and agreements. However, custodian banks do not provide any warranties regarding the services under the new transport service models between the operators and users.
(6) Coordinated supervision by multiple authorities: In order to strengthen the supervision of user funds, the Measures define the duties and responsibilities of relevant authorities and organizations in the place of incorporation of new transport service model operators. These administrative authorities include branches of the People’s Bank of China, the National Development and Reform Commission, market regulators, local offices of China Insurance Regulatory Commission and China Banking Regulatory Commission and consumer associations (committees).
The Measures took effect on 1 June 2019. In consideration of the time required for operators to open dedicated savings accounts, connect their information systems to those of the banks and complete any other appropriate work, the Measures give a transition period of six months for existing user funds to be included in the scope of the regulation. The Measures have provided a well-established and comprehensive framework for regulating the safe custody of user funds under new transport service models. It is believed that they can provide a model for regulatory frameworks in other industries.
Wu Jiejiang is a partner at Jingtian & Gongcheng