The CBRC, along with the Ministry of Industry and Information Technology, Ministry of Public Security and Cyberspace Administration of China, then released the Tentative Measures for the Administration of the Business Activities of Peer-to-peer Lending Information Intermediaries (Tentative Measures) on August 17, 2016, which clarified a number of key issues faced by the P2P lending industry such as business scope, industry position, regulatory model, operational guidelines and risk prevention measures. Supporting documents and regulations to facilitate the implementation of these rules are expected to follow, including, for example, the financial filing and bank depository regulations for funds of online lending customers.

Popular P2P online lending operators today include Paipaidai (ppdai.com), which had 1.2 million registered members in 2015 and a total transaction volume of over Rmb1.4 billion by mid-2014, and Dianrong.com, through which personal loans range on average between Rmb50,000 and Rmb150,000 while loans to small and medium-sized enterprises (SMEs) average Rmb1 million to Rmb2 million. Beijing-based Jimubox.com had accrued half a million users in less than a year after it started lending in 2013, and Renrendai.com had 1 million users at the end of 2014, data from the Association of Chartered Certified Accountants show.

The scope of the new P2P rules

The new Tentative Measures do not target all online lending activities, but carry a specific aim to regulate information intermediary platforms engaged in the P2P lending business, i.e. online platforms through which a person directly lends money to another (a “person” can be a natural person, legal person or any type of organization).

Firstly, they prohibit platforms from providing any form of indirect lending services. An example is debt assignment, where a platform or its related party will first loan money to borrowers and then assign creditor's rights to the ultimate lenders (in practice, however, this type of activity may be treated as a disguised lending business carried out by the platform itself and has been further restricted under the Tentative Measures). Secondly, direct lending must be from person to person. This is in contrast to internet microloans, which involve a platform arranging a microloan to clients online through a third-party professional microlender.

Online financial platform service providers are advised to conduct a self-inspection as to whether they are subject to the regulation of the Tentative Measures. They should communicate with, and seek clarification from, the relevant authorities before taking any corrective measures in accordance with the new rules.

P2P online lending defined

The Tentative Measures regulate both P2P online lending activities and platforms from both qualitative and quantitative perspectives. From a qualitative perspective, the P2P internet lending platform is by nature an “information intermediary”, providing “information gathering, information publication, credit rating, information exchange, and borrower and lender matching mainly through the internet to assist borrowers and lenders in achieving direct lending”. To this end, the new rules apply the negative list model in order to prohibit mixed or unregulated operations in P2P lending that have been frequently observed (e.g. providing loans to the public without authorization), and list 12 specific behaviors—plus “other” activities—in violation of the role of an information intermediary (e.g. providing credit enhancement, operating offline businesses and bundling sales with other financial products).

Specifically, Article 10 of the Tentative Measures sets the following 13 restrictions. According to this negative list, a P2P lending platform must not:

1. Seek financing for itself.
2. Directly or indirectly accept or pool lender funds.
3. Provide security for lenders or promise guaranteed principal and interest.
4. Promote, or engage a third party to promote, a financing project in physical locations (i.e. offline)
5. Extend loans.
6. Break up the time limit for a financing project into separate pieces.
7. Sell wealth management or any other financial products to raise funds.
8. Engage in the asset securitization business.
9. Mix, bundle or act as an agent in the investment, sale, brokerage of another organization.
10. Falsify earnings prospects of a financing project, fail to disclose risks, conduct fraudulent or deceptive promotion, or disseminate false or incomplete information to harm or mislead lenders or borrowers.
11. Provide services where the purpose of the loan is high-risk financing, such as investment in stocks, OTC financing, futures and other derivatives.
12. Engage in equity crowdfunding.
13. Any other activities prohibited by laws, regulations or P2P lending-related provisions.

While clarifying the types of activities that P2P lending firms are banned from engaging in, the negative list approach also provides a space for possible financial innovations. For instance, platforms are not allowed to offer guarantees without authorization, but the current provisions do not expressly prevent their related parties from doing so. This is sure to promote active communications between platforms and other financial institutions, such as insurance companies, seeking to develop a new cooperative model for guarantees in favor of online lending.

From a quantitative perspective, the Tentative Measures stick to the nature of P2P online lending, i.e. “inclusive finance” (lending to the public). They define P2P loans as “micro debt” and set a ceiling amount for the total loan balance available to each person through one or more online lending platforms, which echo the conviction standard for the crime of “illegally absorbing the public deposit” under the PRC Criminal Law. Internet platforms engaging in large loan businesses—particularly those that offer real estate mortgage loans—could therefore be heavily affected.

It is, however, worth noting that the Tentative Measures only set a capped loan balance amount instead of a lifetime limit, which makes it possible for borrowers to obtain loans repeatedly, so long as the total outstanding debt amount remains under the statutory ceiling. The Tentative Measures urge both borrowers and lenders to reasonably estimate and plan their capital demand and supply, and to take the initiative to diversify their loans.

An individual can borrow up to Rmb200,000 on one P2P platform, and up to Rmb1 million over several platforms, according to the rules. For companies and organizations, the ceilings are set at Rmb1 million per platform and a maximum of Rmb5 million over several. These total loan value limits have also been set against the broader backdrop of curbing credit-fueled risks in the domestic economy.

Platform setup criteria

While the only requirement is to file with the financial regulatory authorities, the conditions and standards for acceptance and the degree of complexity of the filing process—including whether registration could even develop into a form of pre-licensing—still remain uncertain. And despite a financial access threshold for the establishment of P2P lending platforms has not been put forward, the Tentative Measures do not rule out the possibility that one may be set in the future.

Given that these platforms provide value-added telecommunications services (VATS) to the public, the new rules explicitly require them to obtain a telecom business permit, but do not clearly indicate which exact license is needed. Furthermore, local telecom regulators may have varying opinions as to the classification of telecom businesses in practice. In this respect, whether ICP [internet content provider] permits for “internet information services” or EDI [electronic data interchange] licenses for “online data processing and transaction processing” are necessary for these online platform service providers, including P2P lending companies, remains unclear. Platforms should avoid blindly applying for VATS licenses, and instead submit their registration of incorporation and financial filing first, and then consult with the telecom authorities directly, all the while keeping a close eye on relevant regulatory explanations and interpretations.

Bank depository system

The introduction of the bank depository system is one of the key changes in the Tentative Measures. Commercial banks have generally been reluctant to take on the role of third-party custodian and prefer to establish a high access threshold for P2P lending platforms due to the lack of clear policies. The promulgation of these new regulations and imminent release of depository-related implementation rules, however, will establish firmer legal grounds for commercial banks to carry out depository businesses in favor of P2P lending platforms, motivating them to set up such services.

The Tentative Measures also protect commercial banks' interests by providing that they are not responsible for the authenticity and accuracy of online lending information. The new depository system enhances the liability of P2P platform operators as a result. While negotiating cooperative agreements with commercial banks, it would be prudent for P2P platforms to clearly define and restrict the banks' scope of exemptions from liability or from the disclaimer, and limit the range of compensation provided by the platforms.

The regulations also introduce a strict information disclosure and reporting system, require examinations on the qualifications of lenders and borrowers and impose other internal control mechanisms as a means of further reducing systemic risks in the internet lending industry.

In a nutshell, these new rules reflect the PRC financial and industry regulators' determination to clean up and repair the online lending sector as a whole. They have far-reaching implications for the sound development of P2P internet lending, and a series of detailed implementation rules and guidelines will be published to support the Tentative Measures. Internet financial companies should pay close attention to the authorities' legislative and administrative practices and be proactive in taking self-improvement measures and conducting compliance checks according to applicable laws and regulations.

Steven Yu, Partner
Global Law Office, Beijing

China, with 700 million internet users, is the world's fastest-growing market for internet finance. The industry boom has led to perceptions that the evolution of peer-to-peer (P2P) lending in the country has been too rapid and disorderly, creating a convoluted mechanism that has deviated from its original track of providing convenient financing means where, in its purest form, one individual simply lends money to another. Such criticism was largely fueled by the lack of focused regulatory policies and legally defined limits on the industry's activities.

Official data from the China Banking Regulatory Commission (CBRC) show that, at the end of June this year, 40% of the total 4,127 P2P lending platforms were suffering from operational problems, meaning repayments had ceased, they had been investigated by the police, or the operators simply ran away with investor funds—the most famous case being the alleged Ponzi scheme, Ezubo, which involved more than Rmb50 billion ($7.6 billion) in fraud and over 900,000 affected investors. Meanwhile, outstanding loans issued by P2P platforms in “normal” condition reached Rmb621.3 billion ($93.6 billion) in mid-2016. This is in contrast to 2012, when only 50 financing platforms were in the market, loaning out a total of Rmb3.1 billion to 28,000 borrowers, according to the McKinsey Global Institute.

New regulations, aimed at returning these companies to their core business, preventing financial risks and protecting investors' interests, were issued this year. They set strict operational and establishment restrictions on P2P online lending platforms, confine them to private lending businesses and define their scope of liability.

P2P online lending was first classified as “internet finance” and as a form of private lending in the Guiding Opinions on Promoting the Healthy Development of Internet Finance (Guiding Opinions) issued in July 2015 by the People's Bank of China and nine other departments, including the CBRC. The Guiding Opinions empowered the CBRC as the supervising authority of internet lending and for the first time, defined the nature of the sector as an “intermediary platform”.

The CBRC, along with the Ministry of Industry and Information Technology, Ministry of Public Security and Cyberspace Administration of China, then released the Tentative Measures for the Administration of the Business Activities of Peer-to-peer Lending Information Intermediaries (Tentative Measures) on August 17, 2016, which clarified a number of key issues faced by the P2P lending industry such as business scope, industry position, regulatory model, operational guidelines and risk prevention measures. Supporting documents and regulations to facilitate the implementation of these rules are expected to follow, including, for example, the financial filing and bank depository regulations for funds of online lending customers.

Popular P2P online lending operators today include Paipaidai (ppdai.com), which had 1.2 million registered members in 2015 and a total transaction volume of over Rmb1.4 billion by mid-2014, and Dianrong.com, through which personal loans range on average between Rmb50,000 and Rmb150,000 while loans to small and medium-sized enterprises (SMEs) average Rmb1 million to Rmb2 million. Beijing-based Jimubox.com had accrued half a million users in less than a year after it started lending in 2013, and Renrendai.com had 1 million users at the end of 2014, data from the Association of Chartered Certified Accountants show.

The scope of the new P2P rules

The new Tentative Measures do not target all online lending activities, but carry a specific aim to regulate information intermediary platforms engaged in the P2P lending business, i.e. online platforms through which a person directly lends money to another (a “person” can be a natural person, legal person or any type of organization).

Firstly, they prohibit platforms from providing any form of indirect lending services. An example is debt assignment, where a platform or its related party will first loan money to borrowers and then assign creditor's rights to the ultimate lenders (in practice, however, this type of activity may be treated as a disguised lending business carried out by the platform itself and has been further restricted under the Tentative Measures). Secondly, direct lending must be from person to person. This is in contrast to internet microloans, which involve a platform arranging a microloan to clients online through a third-party professional microlender.

Online financial platform service providers are advised to conduct a self-inspection as to whether they are subject to the regulation of the Tentative Measures. They should communicate with, and seek clarification from, the relevant authorities before taking any corrective measures in accordance with the new rules.

P2P online lending defined

The Tentative Measures regulate both P2P online lending activities and platforms from both qualitative and quantitative perspectives. From a qualitative perspective, the P2P internet lending platform is by nature an “information intermediary”, providing “information gathering, information publication, credit rating, information exchange, and borrower and lender matching mainly through the internet to assist borrowers and lenders in achieving direct lending”. To this end, the new rules apply the negative list model in order to prohibit mixed or unregulated operations in P2P lending that have been frequently observed (e.g. providing loans to the public without authorization), and list 12 specific behaviors—plus “other” activities—in violation of the role of an information intermediary (e.g. providing credit enhancement, operating offline businesses and bundling sales with other financial products).

Specifically, Article 10 of the Tentative Measures sets the following 13 restrictions. According to this negative list, a P2P lending platform must not:

1. Seek financing for itself.
2. Directly or indirectly accept or pool lender funds.
3. Provide security for lenders or promise guaranteed principal and interest.
4. Promote, or engage a third party to promote, a financing project in physical locations (i.e. offline)
5. Extend loans.
6. Break up the time limit for a financing project into separate pieces.
7. Sell wealth management or any other financial products to raise funds.
8. Engage in the asset securitization business.
9. Mix, bundle or act as an agent in the investment, sale, brokerage of another organization.
10. Falsify earnings prospects of a financing project, fail to disclose risks, conduct fraudulent or deceptive promotion, or disseminate false or incomplete information to harm or mislead lenders or borrowers.
11. Provide services where the purpose of the loan is high-risk financing, such as investment in stocks, OTC financing, futures and other derivatives.
12. Engage in equity crowdfunding.
13. Any other activities prohibited by laws, regulations or P2P lending-related provisions.

While clarifying the types of activities that P2P lending firms are banned from engaging in, the negative list approach also provides a space for possible financial innovations. For instance, platforms are not allowed to offer guarantees without authorization, but the current provisions do not expressly prevent their related parties from doing so. This is sure to promote active communications between platforms and other financial institutions, such as insurance companies, seeking to develop a new cooperative model for guarantees in favor of online lending.

From a quantitative perspective, the Tentative Measures stick to the nature of P2P online lending, i.e. “inclusive finance” (lending to the public). They define P2P loans as “micro debt” and set a ceiling amount for the total loan balance available to each person through one or more online lending platforms, which echo the conviction standard for the crime of “illegally absorbing the public deposit” under the PRC Criminal Law. Internet platforms engaging in large loan businesses—particularly those that offer real estate mortgage loans—could therefore be heavily affected.

It is, however, worth noting that the Tentative Measures only set a capped loan balance amount instead of a lifetime limit, which makes it possible for borrowers to obtain loans repeatedly, so long as the total outstanding debt amount remains under the statutory ceiling. The Tentative Measures urge both borrowers and lenders to reasonably estimate and plan their capital demand and supply, and to take the initiative to diversify their loans.

An individual can borrow up to Rmb200,000 on one P2P platform, and up to Rmb1 million over several platforms, according to the rules. For companies and organizations, the ceilings are set at Rmb1 million per platform and a maximum of Rmb5 million over several. These total loan value limits have also been set against the broader backdrop of curbing credit-fueled risks in the domestic economy.

Platform setup criteria

While the only requirement is to file with the financial regulatory authorities, the conditions and standards for acceptance and the degree of complexity of the filing process—including whether registration could even develop into a form of pre-licensing—still remain uncertain. And despite a financial access threshold for the establishment of P2P lending platforms has not been put forward, the Tentative Measures do not rule out the possibility that one may be set in the future.

Given that these platforms provide value-added telecommunications services (VATS) to the public, the new rules explicitly require them to obtain a telecom business permit, but do not clearly indicate which exact license is needed. Furthermore, local telecom regulators may have varying opinions as to the classification of telecom businesses in practice. In this respect, whether ICP [internet content provider] permits for “internet information services” or EDI [electronic data interchange] licenses for “online data processing and transaction processing” are necessary for these online platform service providers, including P2P lending companies, remains unclear. Platforms should avoid blindly applying for VATS licenses, and instead submit their registration of incorporation and financial filing first, and then consult with the telecom authorities directly, all the while keeping a close eye on relevant regulatory explanations and interpretations.

Bank depository system

The introduction of the bank depository system is one of the key changes in the Tentative Measures. Commercial banks have generally been reluctant to take on the role of third-party custodian and prefer to establish a high access threshold for P2P lending platforms due to the lack of clear policies. The promulgation of these new regulations and imminent release of depository-related implementation rules, however, will establish firmer legal grounds for commercial banks to carry out depository businesses in favor of P2P lending platforms, motivating them to set up such services.

The Tentative Measures also protect commercial banks' interests by providing that they are not responsible for the authenticity and accuracy of online lending information. The new depository system enhances the liability of P2P platform operators as a result. While negotiating cooperative agreements with commercial banks, it would be prudent for P2P platforms to clearly define and restrict the banks' scope of exemptions from liability or from the disclaimer, and limit the range of compensation provided by the platforms.

The regulations also introduce a strict information disclosure and reporting system, require examinations on the qualifications of lenders and borrowers and impose other internal control mechanisms as a means of further reducing systemic risks in the internet lending industry.

In a nutshell, these new rules reflect the PRC financial and industry regulators' determination to clean up and repair the online lending sector as a whole. They have far-reaching implications for the sound development of P2P internet lending, and a series of detailed implementation rules and guidelines will be published to support the Tentative Measures. Internet financial companies should pay close attention to the authorities' legislative and administrative practices and be proactive in taking self-improvement measures and conducting compliance checks according to applicable laws and regulations.

Steven Yu, Partner
Global Law Office, Beijing