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Client Briefing – NIFA Draws Attention to the Risks of Illegal Online Financial Trading

2017.11.27 XIE, Qing (Natasha)、Brigitte(Bing)Lu

On November 10, 2017, China’s self-regulatory association of internet finance industry, the National Internet Finance Association of China (“NIFA”), released a risk warning on its website: the Risk Warning on Prevention of Illegal Financial Trading on Internet Platforms (“NIFA Warning”). The NIFA Warning, from the strictly legal perspective, is not a regulation. Rather, it is a self-disciplinary document that embodies the regulators’ deliberate initiatives to regulate the behaviors of financial institutions and idea to educate ordinary investors, as well as laying out their view in certain grey areas. 

The NIFA Warning starts off by stating that it comes in the wake of monitoring by the financial regulatory departments and NIFA. This recent monitoring has identified increasing illegal leveraged trading activities associated with diversified underlying assets across various internet platforms, exposing significant financial and social risks. We believe that the regulators have based their warning on the monitoring and assessment of actual risk, which shows the ‘risk-oriented’ approach of regulatory actions.

In addition, the NIFA Warning covers “leveraged trading activity associated with certain underlying assets” conducted through an “internet platform”, among which, an “internet platform” includes websites, mobile terminals or application software, and it could be an internet platform located onshore or offshore (if such an offshore internet platform allows domestic investors to participate in trading in a cross-border manner). The “leveraged trading activity associated with certain underlying assets” includes trading of foreign exchange, precious metals, futures or indices.

A long-term absence of regulation on internet finance has meant that internet platforms engaging in leveraged trading established either onshore or offshore (and accessible to domestic investors) have been operating in a grey area. In issuing the risk warning, the regulators have indirectly determined the legal substance of these activities and demonstrated the underlying regulatory attitude.

First, regardless of whether any leveraged trading is conducted on an internet platform run by an onshore institution or is provided to domestic clients via an offshore internet platform run by an overseas institution, they shall be all deemed illegal.  

Second, all internet platforms (including those incorporated outside China but targeting Chinese investors) currently engaging in leveraged trading such as foreign exchange or precious metals have been established without a legal basis for their presence in China and have not been approved by any Chinese financial regulatory department.  

Third, the establishment of any internet platform carrying out the above trading shall be deemed illegal, hence any party to a transaction undertaken on such a platform will not be entitled to protection under the PRC law.  

The NIFA Warning urges both financial institutions and payment institutions that engage in internet finance business not to provide any service for such illegal financial transactions, and urges the public to reinforce their self-protection awareness. With increasing regulation on the part of the Chinese government in the area of internet finance, we anticipate the regulators will decide whether or not to take any further regulatory actions on the basis of their ongoing monitoring and assessment.

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