Part 1: the pilot programme (Allen & Overy)

In many jurisdictions, consumer finance is a closely regulated industry. The general aim of financial regulators is to achieve a balance between the development of the finance industry and the availability of credit against prudential regulation of the financial system and the protection of consumers. This balance increasingly draws upon the protection of consumers, particularly with regards to the regulations governing financial institutions selling products to individual borrowers.

China has followed a path of close regulation for its consumer finance industry when the China Banking Regulatory Commission (CBRC) issued the Measures for the Administration of Pilot Consumer Finance Companies (中国银行业监督管理委员会消费金融公司试点管理办法) (Pilot Measures) in 2009. Specifically, China opted to establish a limited pilot scheme for the industry's initial development.

The 2009 Pilot Measures and their implementation included a number of significant controls:

• Geographical restrictions to Beijing, Tianjin, Shanghai and Chengdu (all large developed cities). According to the Pilot Measures, the pilot consumer finance companies were not permitted to operate outside their own localities without CBRC approval;
• Restrictions limiting the permitted categories of major investors to financial institutions (domestic or foreign) or other investors approved by the CBRC. While the categories of other investors were not specified, the major investors in the existing four pilot consumer finance companies all satisfied the financial institution requirement;
• A minimum holding for a major investor set at 50% of the equity interests of the consumer finance company; and
• A maximum consumer loan amount which was set at five times a borrower's monthly income.

A general theme if the Pilot Measures is that consumer finance in China would first be trialled in developed cities involving financial institutions (which would already hold the required experience in financial and risk management) as key investors. In addition, borrower protection was implemented through the link between the maximum loan amount and the borrower's monthly income and express provisions relating to the manner of collection of consumer finance loans.

At the end of 2013, the amendments to the Pilot Measures (the Amendments) were issued and became effective on January 1 2014. The Amendments and their application represent an expansion of the existing pilot scheme arrangements as well as a revision to certain limitations in the 2009 Pilot Measures.

The challenges continue

While the changes show clear support from the CBRC for the continuing development of CBRC-regulated consumer finance companies, it is uncertain whether the Amendments will be enough to enable consumer finance companies to become strong, independent participants in the long term in a consumer finance market which is facing ever-increasing competition.

One of the first major challenges will be the ability of consumer finance companies to compete effectively with banks. Banks arguably enjoy numerous advantages over finance companies such as a strong branch network with wide geographical reach, a significant deposit base which provides liquidity for loans and an economical cost of funds, merchant tie-ups for distribution of loan products and credit card and loyalty programmes, all of which have attracted consumers to the financial products offered by banks.

A second challenge for consumer finance companies has emerged in the form of merchants and retailers establishing their own consumer financing businesses. A traditional business model for consumer finance companies is the establishment of relationships with retailers and merchants, to provide loans to consumers who purchase goods from the retailer or merchant. However, new competitors have appeared. For example, Chinese internet companies such as Baidu and JD.com have recently established microcredit companies to offer loan products to finance sales to consumers in connection with their internet businesses. Retailers such as Suning have also established microcredit companies for the purpose of providing financial solutions associated with sales of their products. Both cases highlight the increasing challenges for consumer finance companies if retailers and merchants continue to develop their own consumer financing solutions though non-consumer finance companies.

These examples pose an interesting question relating to the competitiveness of consumer finance companies as a financing platform, if alternatives such as microcredit companies are also available to carry out similar financing activities but may be regulated differently.

While the Amendments provide significant advances, consumer finance companies will continue to face existing as well as continually evolving new challenges to the development of their businesses.


Matthew Bisley, Allen & Overy, Shanghai

Part 2: the Amendments (Concord & Partners)

The Amendments are designed to facilitate the development of consumer finance companies and to incorporate the relevant requirements of the State Council's newly issued Guidelines on Supporting Economic Restructuring and Upgrading through Finance, which sets out gradual expansion of the consumer finance company pilot programme to more cities as well as exploration of ways for private capital to set up consumer finance companies.

Minimum shareholdings

The principal investor's minimum shareholding percentage has been reduced and domestic non-financial entities are allowed to be principal investors in consumer finance companies.

The Pilot Measures divide investors of consumer finance companies into two categories: principal investors and ordinary investors. Investors of different categories should meet different qualifications in order to be investors of consumer finance companies. The definition of the term “principal investor” has been revised by the Amendments so that the minimum shareholding percentage of a principal investor is reduced from 50% to 30%.

Under the former Pilot Measures, only financial institutions (domestic or overseas) could be principal investors of consumer finance companies unless otherwise approved by the CBRC. The Amendments have now allowed a domestic non-financial entity to be a consumer finance company's principal investor provided that the entity meets certain statutory conditions with respect to its assets, financial situation and credit records.

Investor responsibilities

The principal investor's undertaking of consumer finance companies' risks is emphasised.

The Amendments encourage principal investors to underwrite the company's articles of association. This requires that when the company has difficulty in making payments, the principal investors would provide liquidity support to the company, and when the company suffers losses and needs to use its capital, the principal investors would make up for the capital deficiency caused thereby in time.

Principal investors are still required to hold their equity interests in consumer finance companies for a certain period of time. The Amendments have extended this period from three years to five years.

A consumer finance company is now required to have at least one investor that possesses no less than five years of experience in consumer finance business and risk management, and holds no less than 15% equity interests in the company.

An investor with professional experience is required. A consumer finance company is now required to have at least one investor that possesses not less than five years' experience in management of consumer finance business as well as risk management, and holds no less than 15% equity interests in the company.

Business scope

The statutory business scope of consumer finance companies has been amended:

• The former businesses of handling individual loans for durable consumer goods and for general purposes are consolidated into that of handling individual loans for consumption. The term “Individual loans for consumption” is defined by the Amendments as loans granted by consumer finance companies to borrowers for consumption purposes (with the exception of purchasing real property and vehicles).
• A consumer finance company may now take deposits of its domestic shareholders as well as its shareholders' domestic subsidiaries.
• The business of handling assignment of credit assets has been taken off the list of business scope of consumer finance companies.

Regulatory requirements

Certain regulatory requirements on consumer finance companies' business operations have been revised. The geographic restriction on consumer finance companies' business operation has been removed. Previously, the Pilot Measures prohibited a consumer finance company from carrying out business in administrative regions outside the region where it is registered unless otherwise approved by the CBRC. The Amendments have deleted this provision.

In addition, the previous restriction that a consumer finance company can only grant individual consumption loans to borrowers who have applied for loans for durable consumer goods and have a good history in repayment has been removed. The maximum amount of loans granted to a consumer has also been amended from an amount that is five times of the borrower's monthly income to Rmb200,000 (US$32,700). The requirement that a consumer finance company should set up information disclosure rules regarding sensitive information such as financial statements, risk management, and corporate governance has been deleted. Also, the required minimum 10% capital adequacy ratio has been amended to be not less than what is required by the CBRC.

Highlighting consumer protection

The Amendments have added a requirement that a consumer finance company should undertake work to protect consumers' rights in accordance with relevant laws, regulations and those of the CBRC. In particular, a consumer finance company should conduct its business following the principle of transparency, and perform its obligation of notifying consumers sufficiently so they are aware of particulars such as the loan's amount, term, price, methods of repayment, etc.

The amended Measures for the Administration of Consumer Finance Companies is intended to lay down the regulatory guidelines for consumer finance companies in China, and is expected to facilitate the expansion of the consumer finance companies pilot programme. At present, with the State Council's approval, the CBRC has added 10 cities (Shenyang, Nanjing, Hangzhou, Hefei, Quanzhou, Wuhan, Guangzhou, Chongqing, Xi'an and Qingdao) to the pilot programme in addition to the current four cities, which are Beijing, Tianjing, Shanghai and Chengdu. In addition, qualified institutions from Hong Kong and Macau can establish consumer finance companies in Guangdong Province. With the promulgation of the Amendments, the CBRC will continue to approve and supervise pilot consumer finance companies in accordance with the current Pilot Measures.


Shan Lu and Jian Wang, Concord & Partners, Beijing


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Measures for the Administration of Pilot Consumer Finance Companies