China fintech: banking and insurance watchdog CBIRC lays out ways it may punish risky consumer finance companies

Consumer finance companies with lowest grade could face nationalisation
Grading system comes after Beijing suspended Ant Group IPO

Fintech

Alison Tudor-AckroydandEnoch Yiu

Published: 10:21pm, 13 Jan 2021

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China’s top banking and insurance watchdog has created a trial framework for grading consumer finance companies, which could lead to the break-up of the most errant industry players.

The China Banking and Insurance Regulatory Commission (CBIRC) said it would judge these companies on factors such as corporate governance, internal controls, capital and risk management, professionalism and technology, according to a notice on its website on Wednesday. The notice was issued on December 30, but it has only been made public now.

The rating system comes as China clamps down on its rapidly growing consumer finance sector, citing systematic risk and customer complaints. Beijing dramatically suspended the initial public offering of the world’s largest financial technology company, Ant Group, in November.

Smaller fintech and consumer finance players are hoping that the regulator will curb Ant Group’s business activities, creating more space for them to grow. E-commerce giant JD.com has already restructured its financial arm JD Digits into a new group called JD Technology, which combines its fintech, artificial intelligence and cloud businesses.

Guo Shuqing, the CBIRC’s chairman. Photo: Bloomberg

The companies will be graded on a descending scale of one to five, where a consumer finance company graded one is relatively sound. A grade two firm will show minor problems.

A grade three will indicate more serious problems and the regulator will urge the company to take measures to improve its operations and management, make more on-site inspections and potentially restrict its business activities. Companies that show serious misconduct, such as false accounting, will not receive a grade higher than three.

Companies that receive a rating of four will have displayed very serious problems as far as the regulator is concerned and will be required to submit to on-site inspections at least once a year. The regulator could take legal measures to restrict such companies’ high-risk business activities, limit shareholders’ rights, limit the distribution of dividends and replace directors or senior management.

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If a consumer finance company receives the worst rating, grade five, it could be forced to merge or be acquired by another company, submit to a reorganisation, accept strategic investors or close down. As a last resort, the government could also nationalise such firms.

The evaluations will be made by the CBIRC’s regional officials before the end of April every year, based on companies’ performance in the previous year. The results will not be made public, and will be used internally as reference material by the regulator. The companies cannot use the evaluation for advertising purposes.

Meanwhile, Palo Alto-headquartered PayPal has acquired 100 per cent of China’s GoPay, becoming the first overseas company to take control of a third-party payment platform in China, according to media reports that cited corporate information platform Tianyancha.