New Rules on Intermediary Services Offered by Commercial Banks

Commercial banks that operate an intermediary business must obtain approval from, and are subject to supervision by, the PBOC. They must satisfy the requirements set out in Article 5 of the 2001 Provisions. Depending on the type of intermediary business to be offered by the relevant commercial bank, approval from or filing with the PBOC in respect of each specific type of business may be required. Section 1(1) of the Circular now makes it clear that if a type of intermediary business is not specified in the 2001 Provisions as requiring approval of or filing with the PBOC, the commercial bank is allowed to launch the relevant intermediary business upon submitting a written report to the PBOC; it does not need to wait for a response from the PBOC.

Categorization

The 2001 Provisions set out 10 categories of intermediary businesses that required PBOC approval, and 15 categories of intermediary businesses that required registration. The Circular contains an appendix that partially reorganizes the classification set out in the 2001 Provisions. In essence, the different types of intermediary businesses are grouped under the following nine headings in the Circular:

i) settlement;

ii) card services;

iii) agency (including securities agency and insurance agency services);

iv) security / guarantee (including negotiable instruments and standby letters of credit);

v) loan commitments;

vi) transactional services (including derivatives, swaps and forwards);

vii) trusts, fund management and custodianship;

viii) consultancy and advisory services; and

ix) others (including safety deposit box services).

The Circular requires a commercial bank applying to undertake a new type of intermediary business to submit an application in respect of either the specific type of business or the relevant sub-heading in the appendix under which the business falls. The applying bank cannot apply to operate one of the nine types of businesses listed in the Circular without specifying the sub-heading or the specific business. In practice, it will often therefore be in the interest of a commercial bank to apply based on the sub-headings used in the appendix of the Circular, since each sub-heading encompasses several specific businesses. And, once approval or filing is obtained in respect of a sub-heading, the subsequent offering of an intermediary service already contained in the sub-heading only needs to be reported to the PBOC in writing. In other words, additional approval or filing is not required.

For a commercial bank with existing intermediary businesses, a report should be submitted to the PBOC with such existing businesses grouped either into the nine categories specified in the Circular, or into other categories determined by the commercial bank. Such discretion for a commercial bank to invent its own classification is likely to give rise to confusion and create difficulty for the PBOC in imposing further rules specific to only one category of business in the Circular.

It is also difficult to see how the categorization in the Circular will interact with the approval/filing requirement in the 2001 Provisions. It would appear that there are certain categories of business (e.g., an insurance agency or funds business) that call for a higher standard of professional knowledge, and PBOC approval for a bank to carry on such businesses should be based on different criteria than other businesses. At the moment, however, there is no distinction between the information that needs to be submitted by one bank applying to offer one type of intermediary business from another bank that is applying to offer another type of intermediary business, as long as the offering of both types of businesses requires PBOC approval.

Securities Agency Business

Article 7 of the 2001 Provisions provides that the offering of a securities agency business requires approval from the PBOC. Section 3 of the Circular expands on the scope of "securities agency business" and expressly excludes the issuing and direct sale and purchase of securities. In other words, the role of the commercial bank should only be limited to agency services such as those in relation to collection, transfer of funds or distribution of dividends. No similar clarification, however, has been made in relation to the coverage of "insurance agency business".

Regular Reporting

The Circular also imposes on commercial banks undertaking an intermediary business a duty to submit quarterly reports to the PBOC in a specified form. In addition, an annual report should be submitted before January 20 each year detailing the operation of the bank's intermediary businesses, difficulties encountered and a development plan for the next year. It is unclear how such a reporting requirement is to work together with Article 26(3) of the 2001 Provisions. Under Article 26 of the 2001 Provisions, the PBOC can order the cessation of a bank's intermediary business for a variety of reasons, including a case in which the bank has sought to avoid supervision by the PBOC. It is unclear how this may be triggered unless there is further guidance on the level of detail that has to be submitted to the PBOC in a bank's quarterly and annual reports. Objective tests (e.g., by reference to the impact or estimated impact on the bank's market share, pricing for a service or resources employed by the bank) need to be set out so that the right amount of detail will be included in a bank's report to the PBOC.

Improper Competition

Another aspect of the 2001 Provisions that, somewhat surprisingly, hasn't been addressed in the Circular is what constitutes "improper competition". Under Article 26 of the 2001 Provisions, the PBOC can order cessation of a bank's intermediary business if there exists improper competition in the performance of such a business by the bank. This statement is vague and certain objective elements could usefully have been specified so that commercial banks at least know what the 2001 Provisions were aiming to address in Article 26.

Interaction with Other Banking Legislation

It remains to be seen what the PBOC's view would be on the interaction between the Circular and other general banking legislation. For example, banks are generally prohibited from collecting any non-interest income in a syndicated loan transaction, with the exception of foreign banks in Shanghai and Shenzhen, which are currently only allowed to collect an agency fee and commitment fee (each subject to a 0.3% cap of the loan amount) pursuant to the 1997 Syndicated Loan Tentative Procedures and the 1999 Notice on the Expansion of RMB Business by Foreign Banks in Shanghai and Shenzhen. The 2001 Provisions and the Circular do however recognize other roles of the bank, e.g., as financial advisor or arranger. This may imply that an arranger bank or a bank in other advisory capacities in a syndicated loan transaction would be allowed to collect an arrangement fee or other advisory fees as non-interest income under the 2001 Provisions. If that is the case, the relevant prohibition in the Syndicated Loan Procedures and the 1999 Notice could usefully be clarified to reflect this position.