CBRC Unveils Implementing Rules for Auto Finance Companies

The establishment of an AFC is divided into the preparation stage and the business commencement stage. The Implementing Rules clarify that both the CBRC and local banking regulatory bureaux will be involved in the approval procedures for the establishment of an AFC. Specifically, the local bureaux will be responsible for the collection and preliminary review of the application documents, while the CBRC will give the final review and approval for an AFC's establishment and its business scope. While not mentioned in the Procedures, the Implementing Rules stipulate that if an application for establishing an AFC is rejected by the CBRC, the investor(s) are not allowed to submit the same application within six months of the date of the rejection.

An AFC will be granted a "Financial Licence" by the CBRC if it is a wholly foreign-owned enterprise or a joint venture; if it is a domestically funded company, the local bureau of the CBRC will grant the licence. Furthermore, for an AFC with foreign investment, like other foreign-invested enterprises, a foreign-invested enterprise approval certificate will be issued. The Implementing Rules make it clear that the CBRC will be responsible for the issuance of the approval certificate with the authorization of, and on behalf of, the Ministry of Commerce.

Personnel Management

The Implementing Rules focus a great deal on the management of AFC personnel; the number of articles outlining the requirements of an AFC's senior officers is remarkable. It can be inferred that the CBRC will exercise much control on the management of personnel, especially the senior officers, of the AFCs and will depend on such control to uphold corporate governance standards and the overall integrity of the AFCs.

The senior officers of an AFC, defined in the Implementing Rules as the legal representative and personnel who will have a critical role in the decision-making or risk control aspects of an AFC, include the directors, members of supervisory meetings, the general manager, vice general manager, chief financial controller, internal auditor, manager of the auditing department or any personnel having different titles but with similar functions to these positions.

The senior officers of an AFC are subject to two sets of management systems, with the chairman of the board, vice chairman of the board, managing director, director, general manager, vice general manager and the chief financial controller subject to qualification review and approval of the CBRC or local bureaux, while the qualification information of other senior officers are subject to recordal with the CBRC or local bureaux.

Detailed qualification requirements for different senior officers are set out in the Implementing Rules. The highlights of these requirements are as follows:

?without approval from the CBRC or local bureaux, the senior officers of an AFC are prohibited from serving as senior managerial personnel in other operational entities or accepting party or political positions;

?the chairman of the board of an AFC shall not serve concurrently as the general manager of the same company;

?the directors of an AFC are prohibited from serving as senior managerial personnel in other operational entities that have conflicts of interest with the AFC;

?the senior officers of an AFC are subject to a "resignation audit" once they leave the AFC; and

?the CBRC or local bureaux may cancel the qualifications of a senior officer for a fixed period or for his/her whole life due to his/her dereliction and liability.

Risk Control and Supervision

Risk control is considered to be essential to the CBRC's supervision of the AFCs. In addition to the 10% capital adequacy ratio as required in the Procedures, the Implementing Rules further specify the following major risk control measures or criteria:

?except for a wholly foreign-owned AFC with a single investor, an AFC must set up a board; also, a wholly foreign-owned AFC with a single investor shall hire an outside independent director;

?the core assets of an AFC shall be no less than 50% of the total assets of the AFC;

?the credit² extended to a single debtor shall not exceed 15% of the registered capital of an AFC;

?the credit³ extended to the ten largest clients of an AFC shall not exceed 50% of the registered capital of the AFC;

?the credit extended to an AFC's affiliated parties (including affiliated legal persons and natural persons) shall be on terms no more favourable than those offered to other third parties, and shall be properly secured;

?the credit⁴ extended to a single shareholder and its affiliated parties shall not exceed 100% of the capital contribution by such a shareholder in the AFC;

?the outstanding guarantees provided by an AFC shall not exceed 200% of the registered capital of the AFC;

?the value of the fixed assets of an AFC for its self-use shall not exceed 40% of its registered capital;

?the value of the liquidated assets of an AFC shall be no less than 100% of its liquidated debts; and

?the interest rates for auto loans shall not be lower than 10% or higher than 30% of the basic interest rate published by the central bank.

Further Clarifications

In addition to the rules on management of the AFCs described above, the Implementing Rules clarify that Chinese or foreign banks are excluded as investors in AFCs. Also, auto dealers that receive loans from the AFCs shall be specifically engaged in auto sales, while automotive manufacturers or auto dealers of any other kind are excluded.

Conclusion

The Implementing Rules, together with the Procedures, will work as the basic guidelines for the establishment of AFCs in China. Procedural issues aside, the Implementing Rules give strong weight to supervisory issues. Notably, the Implementing Rules have tightened the CBRC's control and supervision of AFCs by specifying and setting forth various criteria and evaluations of market entry, personnel management and risk control by the AFCs.

The authors would like to thank Brianna Tom of their office for her contribution to aspects of this article.

Endnotes

1 See China Law & Practice, November 2003, 17(9), pp. 34-43 for a translation of the Administration of Auto Finance Companies Procedures. Also see Tang & Chen, "Auto Finance Companies Finally Get the Green Light in China," in ibid, pp. 44-48.

2 The "credit" here excludes the credit that is secured by the borrower in the form of cash or cash equivalent.

3 Ibid.

4 Ibid.