Revamping consumer finance regulation: NFRA’s planned amendments

The National Financial Regulatory Administration (NFRA) recently issued the Measures for the Administration of Consumer Finance Companies (Draft for Opinions), which would amend the Pilot Administrative Measures for Consumer Finance Companies based on the development of consumer finance companies in recent years, and regulatory practices. This article makes a brief analysis from the perspective of the contributors and shareholders.

Amendments for contributors

The draft amends the definitions of major contributor and general contributor in the measures, increases the contribution ratio of the major contributor from 30% to 50% , and raises requirements on contributors.

For financial institutions that are major contributors, the draft modifies the provision in the measures stating that the total assets at the end of the most recent year shall not be less than RMB60 billion (USD833.4 million, or its equivalent in freely convertible currencies) to the total assets at the end of the most recent fiscal year shall not be less than RMB500 billion (or its equivalent in freely convertible currencies), which effectively raises the requirements on financial institutions.

Secondly, the newly added equity investment balance shall not, in principle, exceed 50% of the net assets of the enterprise (including the amount of the current investment); and finally, the supervisory rating by financial institutions should be good.

For non-financial enterprises that are major contributors, the draft provides that the operating income for the latest fiscal year shall be RMB60 billion (or its equivalent in freely convertible currency) instead of the previous RMB30 billion (or its equivalent in freely convertible currency).

Second, the proportion of the net assets at the end of the latest fiscal year shall be 40%, up from 30%. Third, the consecutive profitability of the last two fiscal years is changed to the consecutive profitability of the last three fiscal years. Finally, the newly added equity investment balance shall not, in principle, exceed 40% of the net assets of the enterprise (including the amount of the current investment).

For financial institutions that are general contributors of consumer finance companies, the draft provides that, in addition to some of the conditions for major contributors, the registered capital requirement for financial institutions increases from RMB300 million (or its equivalent in freely convertible currencies) to RMB1 billion (or its equivalent in freely convertible currencies); and non-financial enterprises as general contributors of consumer finance companies are required to satisfy the requirement that the balance of equity investment shall not, in principle, exceed 50% of the net assets of the enterprise (including the amount of the current investment).

In addition, the draft raises the contribution ratio requirement for contributors with experience in consumer finance business management and risk control.

Shareholder obligations

Article 25 of the draft is dedicated to the obligations of shareholders, and shareholders of consumer finance companies should fulfil their obligations as shareholders according to the requirements below.

Restrictions on major shareholders’ disposal of equity interests. While the measures only require major contributors not to transfer their equity interests in a consumer finance company within five years, the draft directly requires major shareholders, i.e. shareholders holding or controlling more than 5% of the shares or voting rights of a consumer finance company, or shareholders with significant influence over the operation and management of a consumer finance company, though holding less than 5% of the total capital or total shares, not to transfer their equity interests in a consumer finance company within five years from the date of acquisition of the equity.

In addition, the draft requires that major shareholders should not pledge or create trusts on their equity interests in the consumer finance company.

Major shareholders’ obligation to replenish capital.
In order to enhance the risk resilience of consumer finance companies, the draft follows the Implementation Measures of Administrative Licensing Matters for Non-bank Financial Institutions and requires that major shareholders should replenish capital to consumer finance companies when necessary, and provide liquidity support to them when they have liquidity difficulties.

Safeguarding the independent operation of consumer finance companies.
Due to the concentration of shareholdings in a consumer finance company, the draft explicitly requires that shareholders should not abuse their rights, major shareholders should respect the decision-making and management rights of the board of directors and senior management of the consumer finance company, and shareholders and the actual controllers shall safeguard the independent legal person status of consumer finance companies and their autonomy of operation and management.

In addition, major shareholders should establish an effective risk isolation mechanism to prevent the spread and transfer of risks among shareholders, consumer finance companies and other related entities.

Disclosure obligation.
Shareholders shall truthfully inform the consumer finance company of their financial information, equity structure, source of funds, controlling shareholders, actual controllers, related parties, persons acting in concert, ultimate beneficiaries and investment in other financial institutions, etc.

In the event of changes in the above-mentioned parties, the relevant shareholders shall inform the consumer finance company of such changes in writing, in accordance with laws, regulations and supervisory provisions. The consumer finance company shall promptly report such circumstances to NFRA local offices.

Conclusion

The release of the draft signifies that consumer finance companies will face a new regulation situation. In addition to the contents mentioned in this article, the draft also adds sections on managing co-operative institutions and protecting consumers’ rights and interests, making new requirements for consumer finance companies, boards of directors, and senior management personnel.

Relevant persons should study the draft, take it as a guide, make corresponding adjustments in time, and prepare in advance for the implemention of the Measures for the Administration of Consumer Finance Companies.

Guan Zhenming is a senior partner at Joint-Win Partners