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Regulation of Cross-Border Supply of Foreign Financial Services – What's Next?

2021.11.16 XIE, Qing (Natasha)、 QIN. Tianyu、 LUO, Danchen

Unlike certain mature financial markets having established a relatively comprehensive registration regime, China has not yet established a legal system for the registration or approval by which foreign providers may offer financial services or products to Chinese domestic residents in a cross-border manner without needing to set up a commercial presence in China. The Futures Law of People’s Republic of China (Consultation Paper) (released by China’s highest legislative body on April 29 of this year and renamed the “Futures and Derivatives Law of People’s Republic of China (Consultation Paper)” on October 23) has specified that foreign futures exchanges shall register with the futures regulatory authority of the State Council if they intend to provide Chinese domestic entities or individuals with direct access to the trading system for their trading activities, as do foreign futures operation institutions if they would like to conduct relevant futures trading abroad for Chinese clients based on an entrustment of a Chinese domestic futures operation institution, which is the very first time in a financial statute level, that China has imposed the registration requirement on cross-border financial service providers, a step forward from the 2019 Securities Law of People’s Republic of China that was silent in this respect. Given the complexity of cross-border financial services, it is expected that the registration requirements for different types of cross-border financial services will be gradually introduced in financial legislature documents, instead of rushing to launch a comprehensive registration regime covering all types of cross-border financial services, which we believe is consistent with how China’s legislative bodies are accustomed to developing new laws. Having said that, the industry also expects that it will take a long time for China to establish a comprehensive cross-border financial services registration system .


In reality, the cross-border supply of financial services via the Internet has developed rapidly in recent years. More and more foreign Internet financial service providers are seeking customers in China, these cross-border activities are happening on a huge scale and expanding rapidly. Chinese regulators have noted the arising challenges to the current financial regulatory system of China and the likelihood of adversely impacting our financial stability. Given that such business activities currently fall into a gray area, a certain level of regulation is urgently needed. The regulators may decide to draw a line between “lawful” and “illegal” for these activities based on legal principles and the spirit of the current law to give clear signals to the market, as well as mobilize the limited law enforcement resources available to actively respond to these regulatory challenges.


On October 24, 2021, Sun Tianqi, head of the Financial Stability Department of the People’s Bank of China (PBOC), delivered a speech entitled Realization of National Boundaries and Client Group Boundaries of Financial Licenses in the Digital Context, presented at the Third Bund Financial Submit (the “2021 Speech”). Mr. Sun published a prior article on the same issues in 2020 entitled Opening-up and Supervision of Cross-Border Supplied Financial Services in the Financial Technology Context (the “2020 Article”). In the absence of explicit legislation for cross-border financial services, reading Mr. Sun’s speech and article can provide some insight into the perspective of a senior official of PBOC, the so-called “Super Financial Regulator,” regarding the legitimacy and limits of cross-border financial services.


1. Prohibited Foreign-Provided Financial Services


In the 2021 Speech, Mr. Sun first iterated the very limited scope of foreign-provided financial services which China has committed to allowing under the Schedule of Specific Commitments for Trade in Services of the General Agreement on Trade in Service (the “GATS”). Mr. Sun further referred to the Special Administrative Measures for Cross-Border Service Trade at Hainan Free Trade Port (Negative List) (2021 Edition) released by the Ministry of Commerce of the People’s Republic of China (MOFCOM) on July 26, 2021, under which certain foreign-provided financial services related to securities are permissible, slightly expanding the aforesaid committed scope under the GATS. Based on the foregoing, Mr. Sun clearly indicated that except for certain financial services explicitly permitted by the Chinese laws, regulations, and regulatory policies, China does not permit any other foreign-provided financial services. As for the recent global practices, even under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (the “CPTPP”), a relatively liberal framework for service trade, service providers without an established “commercial presence” in another member country’s territory are allowed to provide cross-border financial service but they are still required to complete a registration with or obtain an authorization from the competent authorities of that member country.


We believe that the basic stance of Chinese regulators on the compliance issues related to cross-border financial services can be inferred from Mr. Sun’s official remarks. That is, under the current Chinese legal system, foreign-provided financial services are permissible only insofar as they are explicitly granted by laws and after obtaining approval or registration. The proverb that “anything is allowed that is not prohibited by the law” does not apply in the financial regulatory context. As China is likely to seek a more liberal policy for its financial market comparable to more mature markets, we can reasonably expect China’s regulators to inevitably impose an approval or registration requirement on foreign providers of financial services if their relevant activities extend to the territory of mainland China.


It is within this context that Mr. Sun explicitly pointed out in the 2021 Speech that foreign institutions providing financial services from abroad via the Internet constitute an unapproved cross-border supply and these are illegal financial activities. This also echoes the 2020 Article, in which he discusses the categories of illegal foreign-provided financial services:

(1) Foreign exchange margin trading: This type of transaction is currently prohibited in China. Foreign institutions are not allowed to provide Chinese domestic residents with cross-border foreign exchange margin trading services via overseas “foreign exchange trading platforms”.

(2) Cross-border trading services for stocks, futures offered to Chinese domestic residents: Some securities companies, with only foreign securities brokerage licenses or investment adviser licenses, offer Chinese domestic residents financial services to invest in US or Hong Kong listed stocks via the Internet or APPs, such as order placement and execution services.

(3) Cross-border payment services offered to Chinese trade enterprises: Foreign institutions or overseas subsidiaries of domestic institutions offer Chinese trade enterprises services such as opening offshore accounts and cross-border payment.

(4) Initial coin offering (ICO) and trading: Foreign or domestic institutions offer Chinese domestic residents Bitcoin trading services or ICO services from abroad via the Internet.

(5) Cross-border financial services for Chinese domestic residents buying real estate abroad: For example, some Chinese wealth management groups set up offshore entities in different jurisdictions and obtain their financial licenses to form cross-border financial service groups, or cooperate with existing foreign financial institutions, to provide cross-border financial services to Chinese domestic residents in a concealed manner.

(6) Cross-border match trading or cross-border order-matching: On the surface, it seems no money flows in or out but in substance it is an illegal foreign exchange transaction, which is a type of prohibited underground money exchange.


According to Mr. Sun, the above-mentioned illegal cross-border financial services can be further divided into three categories. The first category is that the transaction itself is not yet open to foreign investors and is explicitly prohibited in China, but it is lawful overseas. In that case, engaging in such transactions with only foreign licenses within the territory of China shall be determined to be in violation of Chinese prohibitive laws. For example, foreign exchange margin trading, ICO. 


The second category is that the transaction itself is not yet opened to foreign investors but is not explicitly prohibited in China. In that case, provision of services from abroad without first obtaining licenses required domestically shall be determined to be conducting financial services without proper license, so called “driving without a license”. For example, though current Chinese laws do not explicitly prohibit such cross-border services as providing offshore securities investment services to Chinese domestic residents or the sale of investment-type insurance products to mainland China investors, the legality of such businesses shall be in question because foreign institutions offer such services without domestic licenses. Moreover, some domestic companies cooperate with their overseas subsidiaries, claiming that they simply provide an introduction of overseas financial products to domestic investors rather than conducting financial businesses, which in essence also falls into this same category – that is, so called “driving without license”, according to Mr. Sun in the 2020 Article.


The third category is that the transaction itself is opened to foreign investors, however, it is explicitly required to establish a domestic “commercial presence” for providing such financial services, while the relevant party has no such commercial presence but still provides such services. For example, foreign payment institutions need to establish a foreign-funded enterprise in China if they provide payment services to Chinese trading enterprises in a cross-border manner.


2. Focus of the Regulators in Cross-Border Supply


2.1 Focus of the Regulators


According to Mr. Sun, the Chinese financial market is very attractive to foreign institutions due to its size and increasing liberalization, whilst the unlicensed cross-border supply of financial services via the Internet may impact Chinese financial order. In this regard, China must emphasize the regulatory principle of “licensed operation of financial businesses.” Based on our observations, it may only be a matter of time before China follows the example of other jurisdictions with mature financial markets requiring cross-border financial service providers or financial instruments supplied in a cross-border manner to be registered or obtain authorization.

The PBOC, as the so-called “Super Financial Regulator,” has underlined on many occasions that operating any financial business within the territory of China requires relevant licenses, regardless of whether they are conducted by domestic or foreign institutions. Secondly, the PBOC may coordinate different departments to launch crackdowns of “unlicensed drivers” targeting cross-border supplied financial service providers. Mr. Sun has also highlighted in the 2020 Article that at the current stage, the focus of law enforcement should be the financial businesses that are more likely to incur high risks to domestic market participants, while financial regulatory authorities shall reserve their discretion in insisting on licenses for operators of other financial businesses casting a low risk to domestic market participants. The 2020 Article lists the following three typical types of high-risk financial businesses that the regulators are focused on in the context of cross-border supply:

(1)Domestic institutions set up companies abroad and have these companies apply for foreign financial licenses, by which providing round-trip financial services that are prohibited or require licenses in China to domestic residents via digital platforms.

(2)Foreign companies sell financial products to Chinese domestic residents via digital platforms, while establishing consulting firms or training firms onshore to engage in relevant marketing or promotional activities in a concealed manner.

(3)Under the guise of foreign exchange margin trading or other investment activities, domestic entities do not actually engage in genuine investment and trading activities, but instead illegally fundraise or commit fraud.


We believe that the above-mentioned activities are typical illegal cross-border supply businesses targeted by the regulators, but this list is not exhaustive.


2.2 Advertising of Foreign Financial Services under a Cross-Border Supply Mode


“In the cross-border supply context, it is also illegal for foreign financial service providers to place advertisements within the territory of China by various of means,” Mr. Sun stated in the 2020 Article. The Advertising Law of the People’s Republic of China explicitly stipulates that “if the matter concerned with the advertising content is subject to a regulatory approval, the advertisement shall comply with such approval.” Hence, if a foreign institution publishes an advertisement of financial services within the territory of China, it needs to obtain prior approval relevant to that financial service from the competent financial regulatory authority. In other words, foreign institutions shall not place financial advertisements within the territory of China if they have no relevant license.


Our Observations


Though both Mr. Sun’s speech and article were concerned with the context of digital or financial technology, we believe that the regulatory principles of the law contained therein shall apply to all types of cross-border supply of financial services or products, irrespective of the “digital” or “financial technology” context. There is a trend of regulators beginning to regulate the cross-border supply of financial services, meaning that without approval or registration, foreign financial service or product providers shall not offer financial services or products to Chinese domestic entities or individuals. It reminds foreign financial practitioners of the regulatory principle that financial business must be carried out with appropriate licenses and warns foreign financial practitioners to rectify their improper business activities established when the regulations were unclear and have continued. In practice, we have noted that some foreign institutions have been operating in the gray area, such as soliciting Chinese domestic residents or marketing foreign financial services or products within the territory of mainland China. We would recommend that foreign institutions cautiously assess and manage the compliance risks associated with cross-border activities according to the latest regulatory principles, formulate internal compliance guidelines to address its staff, and keep abreast of the progress of legislation and enforcement of cross-border financial services.

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