Tentative Measures for the Administration of Financing Security Companies

(Promulgated by the China Banking Regulatory Commission, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Finance, the Ministry of Commerce, the People's Bank of China and the State Administration for Industry and Commerce on, and effective as of, March 8 2010.)

Order of CBRC, NDRC, MIIT, MOF, Mofcom, PBOC and SAIC [2010] No.3

Part One: General provisions

Article 1:These Measures have been formulated pursuant to laws such as the PRC Company Law, the PRC Security Law and the PRC Contract Law in order to strengthen the oversight of financing security companies, regulate the provision of financing security and promote the healthy development of the financing security industry.

Article 2:For the purposes of these Measures, the term “financing security” means the act whereby a guarantor agrees with a banking financial institution or other such creditor that in the event that the secured party fails to discharge its financing debt to the creditor, the guarantor will assume, in accordance with the law, the security liability specified in the contract.

For the purposes of these Measures, the term “financing security company” means a limited liability company or company limited by shares established in accordance with the law and engaging in the financing security business.

For the purposes of these Measures, the term “regulator” means the department determined by the people's government of a province, autonomous region or municipality directly under the central government with the responsibility of overseeing financing security companies in its jurisdiction.

Article 3:A financing security company shall be governed by the business principles of safety, liquidity and profitability, and shall establish a sustainable, prudent business model that is characterised by market-oriented operation.

In its business dealings with enterprises, banking financial institutions and other such customers, a financing security company shall abide by the principle of good faith and comply with contractual provisions.

Article 4:In carrying on its business in accordance with the law, a financing security company shall not be subject to interference by any authority, work unit or individual.

Article 5:In carrying on its business, a financing security company shall comply with laws, regulations and these Measures, and may not harm state interests or the public interest.

A financing security company shall maintain the confidentiality of its customers, and may not use information provided by a customer to engage in activities that are unrelated to the security business or that are harmful to the customer's interests.

Article 6:In carrying on its business, a financing security company shall comply with the principle of fair competition and may not engage in unfair competition.

Article 7:Administration of financing security companies shall be effected by the people's governments of the provinces, autonomous regions and municipalities directly under the central government where they are located. The regulator determined by the people's government of a province, autonomous region or municipality directly under the central government shall be specifically responsible for the market access and withdrawal, routine oversight, and handling of risks of financing security companies within its jurisdiction, and shall report on its work to the inter-ministerial committee for the oversight of the financing security business established by the State Council.

Part Two: Establishment, change and termination of business

Article 8:The establishment of a financing security company and its branches and sub-branches shall be subject to the examination and approval of the regulator.

A financing security company or its branch or sub-branch for which establishment has been approved shall be issued a business permit by the regulator, on the strength of which it shall then apply for registration to the administration for industry and commerce.

No work unit or individual may engage in the financing security business without the approval of the regulator or use the words “financing security” in its name, unless otherwise provided in laws or administrative regulations.

Article 9:To establish a financing security company, the following conditions shall be satisfied:

(1) having articles of association that comply with the PRC Contract Law;

(2) having shareholders with continuing capital contribution capabilities;

(3) having registered capital complying with these Measures;

(4) having directors, supervisors and senior management personnel with the qualifications to serve in their positions and qualified business personnel;

(5) having a sound organisational structure, internal controls and risk management systems;

(6) having business premises that comply with requirements; and

(7) other prudential conditions as specified by the regulator.

The measures for the administration of the qualifications of directors, supervisors, senior management personnel and business personnel shall be formulated separately by the inter-ministerial committee for the oversight of the financing security business.

Article 10:The regulator shall specify the minimum registered capital requirement for financing security companies based on local realities, which may not, however, be less than Rmb5 million.

Registered capital shall be paid-in monetary capital.

Article 11:To establish a financing security company, the following documents and information shall be submitted to the regulator:

(1) an application letter, which shall state the particulars of the proposed financing security company such as its name, domicile, registered capital and scope of business;

(2) a feasibility study report;

(3) draft articles of association;

(4) the register of shareholders and their capital contributions, and the equity structure;

(5) capital verification certificates issued in respect of the shareholders' capital contributions, proofs of creditworthiness of the shareholders holding at least 5% of the registered capital and relevant information;

(6) proofs of the qualifications of the proposed directors, supervisors and senior management personnel;

(7) the business development strategy and plans;

(8) proof of the place of business; and

(9) other documents and information the submission of which is required by the regulator.

Article 12:If a change in any of the following particulars of a financing security company is to be made, the same shall be subject to the examination and approval of the regulator:

(1) a change in its name;

(2) a change in its organisational structure;

(3) a change in its registered capital;

(4) a change of its domicile;

(5) a change in its scope of business;

(6) a change in its directors, supervisors or senior management personnel;

(7) a change in its shareholders holding at least 5% of its equity;

(8) a division or merger;

(9) an amendment of its articles of association; or

(10) other particulars as specified by the regulator.

Where a change in the particulars of a financing security company involves its registered particulars, it shall apply to the administration for industry and commerce in accordance with provisions for amendment of its registration after examination and approval by the regulator.

Article 13:If a financing security company wishes to establish a branch or sub-branch in a different province, autonomous region or municipality directly under the central government, it shall require the consent of the regulator of the place where it is located and the examination and approval of the regulator of the place where its proposed branch or sub-branch is to be located.

Article 14:If a financing security company needs to be dissolved due to its being divided or merged or due to a cause for dissolution as specified in its articles of association arising, such dissolution shall be subject to the examination and approval of the regulator and it shall apply to the administration for industry and commerce for de-registration on the strength of the approval document in a timely manner.

Article 15:If a financing security company commits a major violation of the law in its operations and failing to close it down would seriously disrupt the market order and/or harm the public interest, the regulator shall close it down, unless otherwise provided in laws or administrative regulations.

Article 16:Where a financing security company is dissolved or closed down, it shall establish a liquidation committee in accordance with the law to carry out liquidation and repay its relevant debts in accordance with the debt discharge plan in a timely manner. The regulator shall supervise the liquidation.

Until its security liabilities have been extinguished, its shareholders may not distribute its property or obtain any benefits from the company.

Article 17:If a financing security company is unable to discharge a debt that has fallen due and its assets are insufficient to cover all of its debts or it clearly lacks the capacity to effect repayment, it shall go into bankruptcy in accordance with the law.

Part Three: Scope of business

Article 18:Subject to the approval of the regulator, a financing security company may engage in some or all of the following financing security businesses:

(1) provision of security for loans;

(2) provision of security for the acceptance of negotiable instruments;

(3) provision of security for trade financing;

(4) provision of security for project financing;

(5) provision of security for letters of credit; and

(6) other financing security businesses.

Article 19:Subject to the approval of the regulator, a financing security company may engage in some or all of the following as side businesses:

(1) provision of security in respect of the preservation of evidence in a legal action;

(2) performance bond business such as the provision of security for bids and advance payments, project performance bonds and provision of security for the payment of final instalments as agreed.

(3) provision of intermediary services, such as financing consultancy and financial advice related to the security business;

(4) investment of own funds; and

(5) other businesses as specified by the regulator.

Article 20:A financing security company may provide security for the security liabilities of another financing security company and provide security for the issuance of bonds but, to do so, it shall satisfy both of the following conditions:

(1) not having a record of a violation of laws or regulations during the last two years; and

(2) other prudential conditions as specified by the regulator.

A financing security company providing security for liabilities of other such companies shall, in addition to satisfying the conditions set forth in the preceding paragraph, have registered capital of not less than Rmb100 million and been continuously in business for at least two years.

Article 21:A financing security company may not engage in any of the following activities:

(1) acceptance of deposits;

(2) extension of loans;

(3) extension of entrusted loans;

(4) investment upon entrustment from others; and

(5) other activities that the regulator specifies may not be engaged in.

If a financing security company engages in illegal fund pooling activities, the relevant departments shall investigate and handle the matter in accordance with the law.

Part Four: Business rules and risk control

Article 22:A financing security company shall establish a sound corporate governance structure and enhance its rules of procedure, decision-making procedure and internal audit system in accordance with the law so as to maintain effective corporate governance.

A financing security company that establishes a branch or sub-branch in another province, autonomous region and/or municipality directly under the central government shall have at least two independent directors.

Article 23:A financing security company shall establish a security appraisal system, decision-making procedure, subsequent recovery and handling system, risk forewarning mechanism and contingency response mechanism that comply with the principle of prudent operations, formulate stringent and compliant business operating rules and strengthen its assessment and management of the risks associated with the projects for which it provides security.

Article 24:A financing security company shall have or engage professionals with the requisite economic, financial, legal and technical qualifications.

A financing security company that establishes a branch or sub-branch in another province, autonomous region and/or municipality directly under the central government shall have a chief compliance officer and a chief risk officer. The post of chief compliance officer or chief risk officer shall be assumed by a person who has acquired qualifications as a lawyer or registered public accountant or other related qualifications and has financing security or financial business experience.

Article 25:A financing security company shall establish a sound financial accounting system, truthfully record and reflect the enterprise's financial position, business results and cash flow in accordance with the requirements of the financial rules for financial enterprises and enterprise accounting guidelines.

Article 26:The security fee that a financing security company charges may be determined through consultations between the financing security company and the secured party themselves based on the risk level of the secured item, but may not violate relevant state provisions.

Article 27:The balance of the liabilities of the financing security that a financing security company provides for a single secured party may not exceed 10% of its net assets, the balance of the liabilities of the financing security that a financing security company provides for a single secured party and its affiliated parties may not exceed 15% of its net assets and the balance of the liabilities of the security that a financing security company provides for a single secured party's bond issue may not exceed 30% of its net assets.

Article 28:The balance of the liabilities of the financing security of a financing security company may not exceed 10 times its net assets.

Article 29:If a financing security company engages in the investment of its own funds, it shall be restricted to investing in fixed return financial products with a relatively high credit rating, such as sovereign bonds, financial bonds and debt financing instruments of large enterprises, and in other investments that do not have a conflict of interest and where the total amount thereof does not exceed 20% of the net assets.

Article 30:A financing security company may not provide financing security to its parent or its subsidiaries.

Article 31:A financing security company shall allocate 50% of its security fee income for the year in question to an unmatured liability reserve, and make an allocation to its security indemnification reserve at the rate of 1% of the balance of its security liabilities as at the end of the year in question. Once the aggregate in the security indemnification reserve reaches 10% of the balance of the security liabilities for the year in question, then allocations shall be made to make up the difference. The measures for making allocations to make up differences and the measures for the use and management of the security indemnification reserve shall be formulated separately by the regulator.

The regulator may require a financing security company to increase the percentage of its security indemnification reserve based on its liability risk position and prudential regulation requirements.

A financing security company shall manage its security liabilities by risk category and accurately measure its security liability risks.

Article 32:A financing security company shall establish a business relationship with a creditor based on the principle of reaching a consensus through consultations, and expressly specify in the contract the method by which security liability is to be borne.

Article 33:A financing security company, in handling a financing security item, shall agree with the secured party that, during the security term, it shall have access to relevant information on an ongoing basis and has the right to verify relevant matters.

Article 34:A financing security company and the creditor shall establish a mechanism for the exchange of relevant information on the secured party during the security term and strengthen guidance and monitoring of the secured party's creditworthiness so as to jointly safeguard both parties' lawful rights and interests.

Article 35:A financing security company shall, in accordance with the regulations of the regulator, provide information on its corporate governance, its financial accounting reports, and information on its risk management position, capital structure and application, the overall standing of its security business and other such information to the relevant creditors.

Part Five: Oversight

Article 36:A regulator shall establish a sound system for the collection, sorting and statistical analysis of financing security company information and a regulatory grading system, effect ongoing monitoring of the business and risk positions of financing security companies, and by the end of June each year shall complete an overview report on the financing security companies subject to its oversight for the preceding year.

Article 37:A financing security company shall submit its business report, financial accounting reports, compliance report and other such documents and information to the regulator in accordance with provisions in a timely manner.

The various documents and information that a financing security company submits to the regulator shall be true, accurate and complete.

Article 38:A financing security company shall report on the application of its capital to the regulator on a quarterly basis.

The regulator shall, in accordance with prudential regulation requirements, put forth as appropriate requirements in respect of the capital quality and capital adequacy ratio of financing security companies.

Article 39:A regulator shall have the right, based on regulatory requirements, to require a financing security company to provide information on a specific matter, or summon its directors, supervisors and senior management personnel for a regulatory dialogue and require them to give an account of relevant matters or effect necessary rectification.

If it deems it necessary, a regulator may circulate to creditors information on the violation of regulations or risk position of a relevant financing security company subject to its oversight.

Article 40:A regulator may, based on regulatory requirements, conduct an onsite inspection of a financing security company. When the regulator does so, the financing security company shall give its co-operation and provide relevant documents and information as requested by the regulator.

When conducting an onsite inspection, there shall be at least two inspectors, and they shall present the inspection notice and their credentials to the financing security company.

Article 41:If a financing security company is involved in a material event, such as being the victim of security fraud, being required to make repayment on behalf of a secured party or incurring an investment loss in an amount that may be equivalent to 5% or more of its net assets, or one of its directors, supervisors or senior officers commits a serious violation of laws or regulations, it shall promptly take emergency response measures and report to the regulator.

Article 42:A financing security company shall report to the regulator on important resolutions adopted by its shareholders' general meeting or shareholders' meeting, board of directors, etc. in a timely manner

Article 43:A financing security company shall engage a private intermediary firm to conduct annual audits and, in a timely manner, submit the audit reports to the regulator.

Article 44:A regulator shall establish with the relevant departments a financing security industry contingency discovery, reporting and handling system, formulate a plan for the handling of contingencies in the financing security industry and determine the organisation responsible for the handling of such contingencies and its duties, handling measures and handling procedure, in order to effectively handle contingencies in the financing security industry in a timely manner.

Article 45:At the end of each year, a regulator shall comprehensively analyse and assess the development and oversight of the financing security industry in its jurisdiction during the year, and by the end of February report thereon to the inter-ministerial committee for the oversight of the financing security business and the people's government of the province, autonomous region or municipality directly under the central government.

A regulator shall report to the inter-ministerial committee for the oversight of the financing security business and the people's government of the province, autonomous region or municipality directly under the central government on material risk events in the financing security industry in its jurisdiction and its handling thereof in a timely manner.

Article 46:The financing security industry shall establish industry self-regulation organisations that shall perform duties such as self-regulation, rights protection and service provision.

The national financing security industry self-regulation organisation shall submit itself to the guidance of the inter-ministerial committee for the oversight of the financing security business.

Article 47:A credit information management department shall incorporate relevant information of financing security companies into its credit information management system and provide services for financing security companies to search relevant information.

Part Six: Legal liability

Article 48:If any of the following circumstances applies to an officer of a regulator who is involved in oversight work, he/she shall be subjected to administrative sanctions in accordance with the law; if a criminal offence is constituted, his/her criminal liability shall be pursued in accordance with the law:

(1) he/she violates provisions in approving the establishment, change, termination or scope of business of a financing security company;

(2) he/she violates provisions in conducting an onsite inspection of a financing security company;

(3) he/she fails to report a material risk event and the handling thereof in accordance with Article 45 hereof; or

(4) he/she commits another violation of laws, regulations or these Measures.

Article 49:If a financing security company violates a law, regulations or these Measures and the relevant law or regulations specify penalties therefor, penalties shall be imposed in accordance therewith; if the relevant law or regulations are silent on penalties, the regulator shall order the company in question to rectify the matter, and may give it a warning and/or impose a fine. If a criminal offence is constituted, criminal liability shall be pursued in accordance with the law.

Article 50:If the third paragraph of Article 8 of these Measures is violated by engaging in financing security business without authorisation, the relevant departments shall close down such operations and impose penalties in accordance with the law. If the words “financing security” are used in a name without authorisation, the regulator shall order rectification of the matter and impose penalties in accordance with the law.

Part Seven: Supplementary provisions

Article 51:The engagement in financing security business by financing security firms organised in a form other than as a company shall be handled with reference to the relevant provisions of these Measures. The specific implementing measures therefor shall be formulated separately by the people's government of the province, autonomous region or municipality directly under the central government and submitted to the inter-ministerial committee for the oversight of the financing security business for the record.

These Measures shall apply to foreign-invested financing security companies, unless otherwise provided in laws and administrative regulations, in which case such provisions shall apply.

The measures for the administration of financing security firms which provide security for liabilities of other such companies shall be formulated separately by the people's government of the province, autonomous region or municipality directly under the central government and submitted to the inter-ministerial committee for the oversight of the financing security business for the record.

Article 52:The people's government of a province, autonomous region or municipality directly under the central government may formulate implementing rules on the basis of these Measures and shall submit them to the inter-ministerial committee for the oversight of the financing security business for the record.

Article 53:If a financing security company established before the implementation of these Measures does not comply with the provisions hereof, it shall be required to do so by March 31 2011. The specific plan for rectification shall be formulated by the people's government of the province, autonomous region or municipality directly under the central government.

Article 54:These Measures shall be effective as of the date of promulgation.