Recent Development of FinTech Regulation in China: A Focus on the New Regulatory Regime for the P2P Lending (Loan-based Crowdfunding) Market

Recent Development of FinTech Regulation in China: A Focus on the New Regulatory Regime for the... Key points FinTech innovation has thrived in China in the past decade. As one leading sector of FinTech innovation, the P2P lending market has experienced an unparalleled growth in China with the Chinese market acceding to be the largest market in the world. This rapid development, while it satisfies the financing need, has brought about industrial risks and regulatory challenges. This article starts with an empirical survey of the explosive development of the P2P lending industry in China followed by an examination of its underlying economic, institutional and technological driving forces. The second part of this article then turns to inspecting, comparatively, several features of regulatory approaches as adopted by the newly established regulatory regime. The third part interrogates two critical challenges which have not been resolved by the new regulatory regimes. The final part concludes. The tentative conclusion is that the newly established regime is a welcome regulatory development. Not only has it provided comprehensive legal protection for participants of the P2P lending market in China; it may also contribute a new model to the global regulatory map for the sustainable growth of the P2P lending market, and the FinTech industry in general. With adequate profit, capital is very bold. A certain 10 per cent will ensure its employment anywhere; 20 per cent certain will produce eagerness; 50 per cent, positive audacity; 100 per cent will make it ready to trample on all human laws … – T. J. Dunning 1. Introduction FinTech, or what in China is more commonly referred to as Internet Finance, is the alternative finance supplying a wide range of conventional or innovative financial instruments via online marketplace channels. These channels fall outside the traditional avenues of capital raising and financial intermediation.1 Its common characteristic is that ‘traditional financial institutions and Internet companies use Internet technology for: payments, internet lending, public equity financing, internet fund markets, internet insurance, internet trust, consumer finance’.2 In recent years, FinTech innovation in China has witnessed an unprecedented boom, which has transformed China into one of the world’s largest online alternative finance markets by transaction volume.3 Among others, Peer to Peer lending (P2P lending) has been one of the leading sectors of the booming FinTech market.4 P2P lending, also referred to as Online Marketplace Lending in the USA,5 or Loan-based Crowdfunding in the UK,6 is essentially one type of private lending. It is generated in the wake of information technology innovations, in particular, the wide spread of the accessible Internet service. It is a novel financing model which bypasses conventional banking intermediaries by directly connecting borrowers and lenders via online Internet portals.7 The first P2P lending platform in the world, Zopa.com was launched in 2005 in the UK. Since then, the P2P lending business has experienced extraordinary growth and has now developed into a vast global industry.8 The rapid development of the P2P lending industry has not only contributed to the financial markets with innovated products and services, but has also exposed borrowers and lenders to severe market failure. Policy makers face regulatory challenges to strike a balance between ‘sufficient regulation for borrow and lender protection without overburdening the young and emerging industry’.9 Several jurisdictions have responded to these regulatory challenges. In the UK, loan-based crowdfunding activities are currently subject to Article 36 H under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) and other rules as set by the Financial Conduct Authority (FCA).10 Firms engaging in P2P lending need to comply with prudential and other standards affecting their structure and operation as well as business conduct rules affecting their deals with lenders and borrowers.11 In addition to the state regulation, P2P lending activities in the UK are governed by a self-regulatory industry association, the Peer-to-Peer Finance Association (P2PFA). The P2PFA bears the missions of, inter alia, promulgating standards and best practices for its member-firms to ensure the transparent, fair and orderly operation of P2P lending industry.12 In the USA, the regulation of the P2P lending sector involves bifurcated oversight by both federal and state regulators.13 The SEC at the federal level has asserted jurisdiction by demanding firms operating P2P lending platforms to be registered as public companies, which must comply with the reporting requirements pursuant to Section 15(d) of the 1934 Securities Exchange Act.14 The SEC also require P2P loans to be tendered as Platform Notes through a prospectus with an effective registration statement, unless exempted pursuant to Section 5 of the 1933 Securities Act.15 Meanwhile, platforms must comply with the federal Dodd–Frank Act and state laws regarding credit consumer protection. Classified as credit consumers, borrowers of P2P loans should be presented by the platforms with specified disclosures regarding the terms of the loans and/or impose substantive restrictions on the terms on which loans are made. No discrimination is allowed against borrowers based on certain protected classes.16 The Consumer Financial Protection Bureau (CFPB), a federal agency responsible for consumer protection in the financial sector, can bring enforcement actions for unfair, deceptive or abusive acts or practices.17 Comparatively, the P2P lending industry in China has emerged and thrived in a regulatory vacuum. For a long time, it was unclear who is a responsible regulator for the market; and there were only rare and piecemeal rules governing the P2P lending activities.18 These rules spread across Criminal Law, Consumer Law, Securities Law, and judicial interpretations of the Supreme People’s Court.19 The lack of a comprehensive regulatory regime has not only contributed, to a great extent, to the unparalleled growth of the P2P lending industry in China, but it has also generated systematic market risks which could jeopardize the sustainable development of the industry.20 Finally in December 2015, several Chinese government agencies released a consultation version of draft rules to regulate the P2P lending sector. The draft law was eventually enacted in August of 2016 as The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries (Measures).21 The Measures introduce the first comprehensive legal framework into China’s P2P lending market. The Measures feature several regulatory approaches which reflect China’s policy makers’ struggle to balance the need to encourage FinTech innovation and the urge to mitigate market risks. Section 2 applies empirical data to examine the explosive growth, the driving forces, and the contingent risks of the P2P lending industry in China; Sections 3 and 4 analyse the new regulatory regime under the Measures and its features from a comparative perspective; Section 5 discusses two critical challenges which have not been fully addressed by the Measures; the final section concludes. 2. Prime position, propulsions and perils The P2P lending industry in China has gained market recognition and position at an astounding pace in recent years due to a unique cluster of driving forces. While having served as one valuable alternative finance resource to the meet the financial demands, the unregulated P2P lending industry has also generated severe market failures and governance risks, and triggered huge concerns about the sustainable development of the industry. Prime position of the P2P lending industry The P2P lending industry emerged in China in 2007 when the first P2P platform, Shanghai Paipaidai Financial Information Service Co, known as PPDai.com,22 was launched. The explosive growth of the industry surged after 2012. As shown in Figure 1, the number of P2P platforms in 2012 was 200; by the end of the next year, the figure had surged by 4 times and reached a record of 800. As of September 2016, the number of P2P platforms was about 20 times more than the number in 2012. Comparatively, there are only 9 firms that have been authorised to offer loan-based crowdfunding platforms in the UK as of July 2016.23 Figure 1 View largeDownload slide The number of P2P platforms in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) Figure 1 View largeDownload slide The number of P2P platforms in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) The increasing availability of P2P lending platforms has attracted a growing volume of registered users, both investors and borrowers. As of September 2016, P2P platforms in China have recorded more that 3.454 million investors, which is 70 times the number in 2012; and 1.469 million borrowers, which is about 30 times the number in 2012 (Figure 2). Figure 2 View largeDownload slide The number of registered users of P2P platforms in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) Figure 2 View largeDownload slide The number of registered users of P2P platforms in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) In the meantime, the growth in the level of capital involved in P2P lending is also astonishing. The amount of P2P trading skyrocketed from CNY 21.2 billion in 2012 to CNY 105.8 billion in 2013: a growth of 5 times; and CNY 1411.2 billion as of September 2016, a growth of about 70 times (Figure 3). Comparatively, P2P lending in the UK generated approximately GBP 2.4 billion of market volume in 2015;24 in the EU, the total number was approximately EUR 3.2 billion;25 in the USA, the figure is about USD 29 billion in loans originated.26 Clearly, China has developed the world’s largest P2P industry in terms of the volume of trading capital, the number of P2P platforms and registered users (Figure 4). Figure 3 View largeDownload slide Capital volume of P2P lending industry in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) Figure 3 View largeDownload slide Capital volume of P2P lending industry in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) Figure 4 View largeDownload slide Capital volume of P2P lending in the UK, the US, and China Source: Cambridge Centre for Alternative Finance Figure 4 View largeDownload slide Capital volume of P2P lending in the UK, the US, and China Source: Cambridge Centre for Alternative Finance Propulsion of the growth in P2P lending The prime position of the P2P lending industry in China is a result of a combination of factors. The first factor is the market force: on one hand, the undersupply of funding for Small and Medium Enterprises (SMEs) and low-income households by the conventional banking institutions; on the other hand, the high yield rate of investment in the P2P lending industry which enticed a supply of capital from both retail and institutional investors. Funding constraints for SMEs and low-income households are globally common. This constraint is exacerbated in China due to its State-Owned Enterprises (SOEs) dominant economy structure and the repressive financial policy.27 Consequently, the SOEs become the primary recipients of loans as supplied by the state controlled banks; while about 70 per cent of SMEs and a similar proportion of low-income households do not receive sufficient funding support.28 Meanwhile, investments in China’s P2P lending market have generated a rather high level of average returns, due to the saving of transaction costs via employing new technologies. Although the investment yield varies, for a long time, the average return for P2P has remained at a rate above 15 per cent.29 This rate is twice the figure for the return generated from many alternative investment vehicles such as the central bank bills, or other online investment schemes (Figure 5). Figure 5 View largeDownload slide Comparison of investment returns of different investment schemes30Source: Yiping Huang et al., 2016 Figure 5 View largeDownload slide Comparison of investment returns of different investment schemes30Source: Yiping Huang et al., 2016 The second major stimulating factor behind the leap forward of P2P industry in China is technological advancement, especially the widespread accessibility of the Internet and the increasing availability of big data. The widespread access of the Internet and the corollary increase of information have enabled finance suppliers and consumers to reduce transaction costs by establishing a direct relationship unencumbered by several layers of intermediaries.31 China is currently home to the largest number of internet users in the world. According to internetlivestats.com, by the end of 2016, the total number of internet users in the world will be more than 3424.97 million; among them, over 721.43 million users will be based in China. In comparison, the UK has 60.27 million internet users, the USA has 286.94 million, 8.35 per cent and 39.77 percent of Chinese, respectively.32 More importantly, a clear majority of Chinese internet users are accessing the internet via a mobile platform, which grants them unprecedented easy connections to the internet and to their peers (Figure 6a and b). Figure 6 View largeDownload slide (a) China internet users 2011–2015. (b) China mobile internet users 2011–2015. Source: China Internet Watch (CIW), China Internet Statistics Whitepaper 2015. Figure 6 View largeDownload slide (a) China internet users 2011–2015. (b) China mobile internet users 2011–2015. Source: China Internet Watch (CIW), China Internet Statistics Whitepaper 2015. In addition, of the large number of internet users in China, over half are actively engaging in online business services including e-commerce, online shopping and third-party payment (Figure 7).33 Their active business engagements generate an extraordinary amount of information data to be utilized by internet companies and financial institutions. Efficient processing of this Big Data can help reduce the information asymmetry problem, which is the central challenge for financial intermediaries when conducting credit evaluation, risk pricing, and transaction matching. Figure 7 View largeDownload slide Online shopping and online payment penetration in China Source: China Internet Watch (CIW), China Internet Statistics Whitepaper 2015 Figure 7 View largeDownload slide Online shopping and online payment penetration in China Source: China Internet Watch (CIW), China Internet Statistics Whitepaper 2015 Take the Ant Financial Services Group (Ant Financial) for an example. Originating in Alipay, the world’s largest third-party payment platform, Ant Financial has access to financial information and other data from some 451 million online accounts of business and individuals.34 In addition, as an affiliate to Alibaba Group Holding Limited, Ant Financial has access to data available on other affiliated online platforms.35 Through technological analysis of such a huge data base, Ant Financial is able to process a loan application from a qualified individual or SMEs within 3 minutes!36 Therefore, the advance of technology and its penetration in China has enabled financial transactions that would otherwise be unviable in the traditional financial industry due to an asymmetric information problem.37 The third major factor facilitating the growth of the P2P lending industry in China is the government’s appeasement policy. The P2P lending service expedites financial innovation and increases efficiency in distributing funding to groups deprived of conventional bank funding. It has been received by China’s policy makers as a way to test new models of financial services to improve the supply of commercially sustainable financial support for underserviced enterprises and individuals.38 For example, in a policy document issued in 2013, the State Council, to enhance financial support for SMEs, decreed that ministries and local governments should ‘make full use of the Internet and other new technologies to innovate and enrich online financial services models’.39 For a long period, since 2007 when the first Chinese P2P lending platform was launched, P2P lending platforms in China have not been subject to market entry rules, industrial criteria or regulatory monitoring as in the UK and the USA. It was only in 2013, the State Council in the Several Opinions on Promoting Information Consumption to Expand Domestic Demand recognized the need to regulate Internet finance services when promoting Internet finance innovation.40 But the government had not made any further regulatory moves until July 2015 when the first official document relating to the overall FinTech industry, namely the Guiding Opinions on Promoting the Healthy Development of Internet Finance, was released. Until then, it was unclear which regulatory authority should be responsible for P2P lending. Accordingly, the China Banking Regulatory Commission (CBRC) acceded to its status as the main regulatory authority over the P2P lending industry in China.41 However, the Guiding Opinions per se provide only a general framework for the overall FinTech industry. Regulatory gaps for the P2P industry were yet to be filled.42 Peril of the P2P lending market Propelled by these factors, P2P lending business in China has experienced an excessive scale of growth. The surge of the P2P lending sector has generated an array of credit risks, business operation risks and information security risks, which may trigger market failure, regulatory failure and even governance failure. Fraud, fund flight and illegal fund-raising have been reported frequently; bilked investors were left out of pocket as many P2P platforms went bust.43 On one side, the collapse of several high profile P2P platforms have caused direct damage and loss to many public investors. Take the Ezubao case for an example. Ezubao was once hailed as the ‘dynamo’ of the P2P lending industry in China.44 It was set up in July 2014 but ceased to operate in December 2015 and eventually closed in February 2016. Upon its collapse, an estimated CNY 50 billion investment from more than 900,000 investors was lost. An investigation later revealed that it was essentially operated as a Ponzi scheme: more than 95 per cent of the projects advertised on its online P2P lending platform were fake.45 Eleven individuals who managed Ezubao are now facing criminal charges of fraudulent fund raising, while another 15 personnel are charged with the illegal absorption of public deposits.46 On the other side, the sharp increase and the wide spread of problematic P2P platforms has generated great concern among the public.47 The number of problematic P2P platforms has skyrocketed from 16 in 2012 to 2,076 in September 2016 (Figure 1). In other words, some 48.2 per cent of P2P platforms were problematic in 2016. Meanwhile, the proliferation of problematic P2P platforms has spread widely across China. A recent survey has observed a similar proportion of problematic platforms across the country (Figure 8).48 Figure 8 View largeDownload slide Regional distribution of proportions of problematic platforms Source: Huang et al. (2016) Figure 8 View largeDownload slide Regional distribution of proportions of problematic platforms Source: Huang et al. (2016) 3. The need for regulations Without regulatory intervention, the P2P lending industry has highlighted ‘the elephant in the room’. Finally, in December 2015, the newly selected regulatory agency—the CBRC—released a first draft of comprehensive rules for the P2P industry, and these were eventually enacted in August 2016 as the binding rules. The binding rules are to comprehensively implement a precursory regulatory attempt over the overall FinTech industry as sketched out under the 2015 Guiding Opinions on Promoting the Healthy Development of Internet Finance. First, the precursory regulatory attempt In July 2015, the Chinese government unveiled the first official document to lay down a regulatory blueprint, some basic requirements and general guidance over the FinTech industry. Titled the Guiding Opinions on Promoting the Healthy Development of Internet Finance, this regulatory document is a joint effort of the People’s Bank of China, and a further nine agents of the central government to oversee a wide range of FinTech innovations.49 The essential purposes of the Guiding Opinions are two-fold: (1) to encourage innovation in Internet finance platforms, products and services to stimulate market vitality; (2) to maintain market order and sustainable development of the Internet Finance industry.50 The Guiding Opinions impose a fragmented regulatory structure over the FinTech industry. Four main government agencies are assigned to regulate different sectors of the Internet Finance industry (Table 1).51 The Guiding Opinions also reinforce the jurisdiction of the Ministry of Industry and Information Technology, and the State Internet Information Office over the provision of financial information services and Internet content services.52 Moreover, the Guiding Opinions instruct the People’s Bank of China to establish the Chinese FinTech Association (CFA) as the autonomous regulator to promote self-regulation of the FinTech market in China.53 Table 1 Main regulators of China’s Fintech innovation Designated regulators  Specified sectors  Main principles  People’s Bank of China  Online payment services  Effective risk isolation and client rights protection mechanisms must be established.  China Securities Regulatory Commission  Equity crowd-funding and online sale of funds  The entities requesting investment shall be SMEs;  All investments made should be small scale in size.  China Insurance Regulatory Commission  Internet insurance services  Risk management and internal control systems must be in place;  Necessary Chinese walls must be established between the insurance and non-insurance business.  China Banking Regulatory Commission  Online lending (including P2P lending and online microfinance), online trust services  P2P online lending platforms shall only play the role of information intermediaries;  Online microfinance shall comply with the existing regulatory provisions issued by CBRC.  Designated regulators  Specified sectors  Main principles  People’s Bank of China  Online payment services  Effective risk isolation and client rights protection mechanisms must be established.  China Securities Regulatory Commission  Equity crowd-funding and online sale of funds  The entities requesting investment shall be SMEs;  All investments made should be small scale in size.  China Insurance Regulatory Commission  Internet insurance services  Risk management and internal control systems must be in place;  Necessary Chinese walls must be established between the insurance and non-insurance business.  China Banking Regulatory Commission  Online lending (including P2P lending and online microfinance), online trust services  P2P online lending platforms shall only play the role of information intermediaries;  Online microfinance shall comply with the existing regulatory provisions issued by CBRC.  As a first precursory regulatory attempt, the Guiding Opinions set out basic rules and general guidance to regulate the FinTech-related undertakings. As far as the P2P lending sector is concerned, the Guiding Opinions draw a clear line between the P2P lending platforms and the conventional banking institutions. The nature of P2P lending platforms is defined as the information intermediary between borrowers and lenders. The roles of P2P lending platforms are restricted to provide information services to facilitate direct lending via the Internet, excluding credit enhancement services or illegal fund raising activities.54 The Guiding Opinions have not provided comprehensive rules concerning the P2P lending sector. The P2P lending business was instructed to be governed by the existing legal framework and relevant regulations on private loans.55 As such, many aspects of the P2P lending business are still in a grey area and require further clarification. For example, it is unclear what are the legal effects of some undertakings by P2P lending platforms, such as transferring factoring rights, or providing guarantees through guarantee companies, and the legitimacy of derivative financial products such as financial lease products as offered on many P2P platforms. These regulatory uncertainties are to be resolved with the enactment of the 2016 Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries. Finally, the comprehensive regulatory regime The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries (Measures) was enacted on 17 August 2016 by the CBRC, conjoint with the Ministry of Industry and Information Technology, the Ministry of Public Security and the Internet Information Technology Office. The Measures consist of eight chapters with a total of 47 articles. The Measures purport to regulate the P2P lending industry from several perspectives. The first is to refine the nature of the essential market participants, namely, lending platforms, borrowers and lenders of the platforms; the second is to clarify the responsibilities of relevant regulatory authorities; the third regulates the business conduct of the market participants. The first aspect is examined in the following section; the other two aspects are analysed in the next part. As the title reveals, the Measures are applicable to the establishment and operation of the Information Intermediary for Online Lending (IIOL) within China.56 An IIOL is hereby clarified as a ‘Financial Information Broker’, who employs an online portal as the main channel to provide financing information intermediary services to borrowers and lenders in the direct private loan business.57 The contents of intermediary services range from collecting and distributing information; to assessing and evaluating credit; through originating and matching loans.58 To make sure an IIOL serves only as the information broker, the Measures bar an IIOL from engaging in the currency credit business and other financial services business, such as increasing credit rating, gathering funds directly or indirectly, raising funds illegally or other business that might jeopardize national or public interests.59 Essentially, an IIOL is constrained to operate online portals where private loan contracts are signed directly between a lender and a borrower. An IIOL can only disseminate information but not assume any credit risk incurred by the online lending business.60 Comparatively, the Measures’ approach to refine an IIOL as an information intermediary contrasts with the nature of many P2P platforms operating in the USA. The SEC’s registration requirement has forced many P2P platforms in the USA to issue loans to borrowers in the platforms’ own names. Instead of assigning the borrower’s obligation to the lender, the US platform issues ‘borrower-dependent payment notes’ to lenders. Thereby, many US platforms assume ‘the role of “creditor” in each transaction’; or in other words, the US platform has essentially ‘stepped in to act as a clearinghouse’.61 The Measures also regulate the other two major market players, namely, lenders and borrowers. The Measures stipulate prudential entry requirements for individuals entering the online lending market. First, the Measures mandate a real name registration system for individuals engaging in the online lending business.62 Whether natural persons or enterprises, they are required to register on the internet platform with true, accurate and complete information about their identities. Secondly, the Measures prescribe the conditions for lenders and borrowers while undertaking online lending transactions. Lenders should be familiar with the use of the Internet and have an awareness of investment risks, a capability for risk identification, and experience of non-guaranteed financial products investment.63 They should only tender funds which are obtained from legitimate sources.64 Thirdly, the Measures mandate that while seeking loans, borrowers must ensure the fidelity and legality of their financing projects, must deploy the secured funds only for the purpose as proposed and must disclose in time material information that could affect the lender’s interests. In addition, borrowers must not seek duplicate financing for the same project via a plurality of P2P lending platforms.65 The Measures officially legalize online loans tendered by or for enterprises which are referred to as legal persons or other entities. Enterprises, especially the Small and Medium Enterprises (SMEs), have been subject to the undersupply of conventional financial services due to repressive financial policy. They have previously turned to funding sources such as shadow banking for alternative sources of financing.66 The P2P lending industry provides SMEs with a legitimate and increasingly crucial source of alternative funding. SMEs in China have now evolved to be the main beneficiary of the P2P lending industry. Between 2013 and 2015, P2P lending platforms have facilitated USD 129.53 billion worth of loans; among them, SMEs have received USD 49.11 billion worth of capital, with an average growth rate of 425 per cent.67 To make sure the P2P lending is a micro-financing alternative for SMEs or individual consumers in need, the Measures stipulate a cap system to control the size of loans taken out via P2P platforms.68 The loan cap for a natural person is CNY 200,000 from one single P2P platform, or CNY 1 million from multiple of P2P platforms; while the loan cap for an enterprise is CNY 1 million or CNY 5 million, respectively.69 Through this capping mechanism, the Measures purport to provide better protection for investors from potential risks involved in the P2P lending activities since the size of lending is under control and maintained at a certain level. 4. Featuring regulatory approaches The P2P lending industry in China, despite its drastic growth, is still in its first decade of development. Nevertheless, the wide spread of high profile lending platform failures has devastating effects on the protection of investor’s interest. Hence the purpose of the recently enacted measures is to prevent irrational investment, to protect the interests of investors and to ensure sustainable growth in the industry.70 To achieve this purpose, the Measures refine entry conditions for players in the P2P lending market. More importantly, the Measures adopt several regulatory approaches to mitigate potential risks without jeopardizing industry innovation. These regulatory approaches include a multifurcate regulatory structure, negative list management, information disclosure requirements and third-party-based monitoring. The multifurcate regulatory structure to devolve regulatory powers The Measures adopt a multifurcate regulatory structure to devolve regulatory powers to simplify the administrative process governing the P2P lending market. First, the CBRC is responsible for the development and implementation of national rules governing P2P lending.71 The CBRC and its local agencies are also mandated to guide and assist local governments with the regulation of P2P lending business in their respective regions, to coordinate and establish the cross-sectoral and trans-regional mechanism for industrial supervision.72 Meanwhile, the Measures decentralize the regulatory structure by giving local governments the vast majority of oversight work to oversee the operation of the IIOLs registered within respective regions. Accordingly, local governments are responsible for the registration of and filings by the IIOLs, for the surveying and collection of industrial data and for reporting any substantial market risk—if it emerges—to the CBRC.73 This regulatory devolution provides local governments the discretion to implement regulation to meet regional conditions. However, this arrangement might risk parochial or inadequate legal enforcement. On one hand, P2P lending transactions are operating via the Internet, local variances of P2P lending markets are not as substantial when compared to other conventional commercial activities which are embedded into local conditions. As some data have indicated, no region-specific patterns have been observed when it comes to the problematic P2P lending platforms74 (Figure 1). On the other hand, the internet-based P2P platforms operate complex interconnected businesses across cities, provinces and even countries. They tend to attract large-scale investors scattered across many regions.75 A good example is the Ezubao fraud. During its 18-months in operation, the Ezubao had run some 1,000 sales agencies nationwide engaging in savvy marketing. When it ceased operation in December 2015, the total loss of estimated £5.3bn had involved about 900,000 people across the country.76 The resolution of such a dispute could easily go beyond the capacity and resources of local governments. Therefore, it would be critical to strengthen the role of the CBRC as the national regulator not only in terms of the formulation and implementation of regulatory policies, but also in the coordination of regulatory enforcements. The Measures also subject the P2P lending market to the jurisdiction of a handful of other governmental agencies. First, as it operates via the online portal, P2P lending business is subject to the regulation of the Ministry of Industry and Information Technology (MIIT) which supervises the telecommunications business including approving and issuing telecommunications business permits (ICP licence).77 Secondly, the Ministry of Public Security (MPS) monitors the internet service safety, investigates activities suspected of violating internet security and other financial crime involved in P2P lending. Last but not the least, the National Internet Information Office (NIIO) scrutinizes the financial information, online content and other services involved in P2P lending.78 Apart from these government agencies, The Measures also endorse the roles of the industrial autonomous regulator. The Chinese FinTech Association (CFA) is acknowledged as the main self-regulatory body and charged with a wide range of duties including: (i) to develop and implement self-regulatory codes, business rules and industry standards; (ii) to educate members and to promote their compliance with relevant law and regulations; (iii) to mediate and resolve—if acceptable—disputes among members; (iv) to receive and inspect complaints and reports by the members and investors; and (v) to set up a designated P2P Lending Speciality Committee.79 It is worth noting that China’s watchdog on the securities market, the CSRC, has been absent from the regulatory map of the P2P lending sector. The CSRC’s regulatory absence contrasts with its counterpart in the USA, where the SEC has asserted itself as the chief regulator over the P2P lending market.80 The key reason is the restricted legislative approach as adopted by the current Chinese Securities Act. The Securities Act has prescribed a strict list of statutory types of securities, but a P2P loan cannot be classified as any one of them.81 While P2P loans in the USA are treated as securities and therefore come under the oversight of the SEC. Thereby in China P2P lending sector is not covered by the CSRC regulatory powers, since P2P lending transactions do not involve the issuance, or transference of statutorily classified securities. The negative list-based approach to curtail administrative costs The Measures, designed to enhance the sustainable development of the P2P lending industry, adopt a much anticipated regulatory approach, namely, the so-called ‘Negative List Approach’ (NLP).82 The NLP was initially introduced to manage foreign investment within the Shanghai Pilot Free Trade Zone.83 It refers to ‘a list of industrial sectors which the host country bans or where it limits foreign investment’.84 Industrial sectors not included in the ‘negative list’ are open to foreign investors and exempted from the governmental approval mandate. The only requirement for foreign investment into unrestricted sectors is the registration and filing of up-to-date information.85 Accordingly, the NLP regulatory approach under the Measures has two interconnecting elements: (1) an explicit list of restricted activities to manage the business scope of IIOLs; (2) a mandatory registration and filing system for P2P lending undertakings. The prohibited activities to reduce the market risks Defined as the information intermediary instead of the credit intermediary, an IIOL can act only as an online information intermediary between lenders and borrowers. Accordingly, the Measures adopt a negative list to prohibit an IIOL to undertake business activities that could jeopardize its nature as an information intermediary. The negative list is incorporated into 12 clauses, which can be grouped into three major categories as shown in Table 2. Table 2 The prohibited activities under the negative list Major categories  The prohibited undertakings  Directly engaging in a lending transaction  Article 10(1), financing their own projects or related parties’ projects with funds solicited via their platforms  Article 10(2), directly or indirectly holding and gathering lenders’ funds  Article 10(5), offering loans, unless permitted by other laws and regulations  Facilitating/Promoting lending transactions  Article 10(3), offering guarantees to lenders or promising fixed returns  Article 10(4), directly or indirectly undertaking offline companioning for financing projects86  Article 10(6), dividing the time framework of financing projects  Article 10(10), misleading the borrowers and the lenders with inaccurate or false information  Engaging in high-risk financial business  Article 10(7), selling or consigning asset management products, securities, funds, insurance products, trust products or other banking financial products  Article 10(8), undertaking assets securitization business, or debt transference activities.87  Article 10(9), compounding, bundling or brokering investment, consignment, brokerage or other services with another institution, unless permitted by laws and regulations  Article 10(11), offering information intermediary service for high-risk capital financing projects investing in stocks, OTC, futures, structured products and other derivatives  Article 10(12), undertaking equity crowdfunding service88  Major categories  The prohibited undertakings  Directly engaging in a lending transaction  Article 10(1), financing their own projects or related parties’ projects with funds solicited via their platforms  Article 10(2), directly or indirectly holding and gathering lenders’ funds  Article 10(5), offering loans, unless permitted by other laws and regulations  Facilitating/Promoting lending transactions  Article 10(3), offering guarantees to lenders or promising fixed returns  Article 10(4), directly or indirectly undertaking offline companioning for financing projects86  Article 10(6), dividing the time framework of financing projects  Article 10(10), misleading the borrowers and the lenders with inaccurate or false information  Engaging in high-risk financial business  Article 10(7), selling or consigning asset management products, securities, funds, insurance products, trust products or other banking financial products  Article 10(8), undertaking assets securitization business, or debt transference activities.87  Article 10(9), compounding, bundling or brokering investment, consignment, brokerage or other services with another institution, unless permitted by laws and regulations  Article 10(11), offering information intermediary service for high-risk capital financing projects investing in stocks, OTC, futures, structured products and other derivatives  Article 10(12), undertaking equity crowdfunding service88  In comparison to the previous draft version, the enacted Measures have incorporated a few notable changes to the negative list. Some of the changes clarify the draft provisions. To give one example, Article 10(4) in the draft version banned ‘the sale campaign targeting at non-real-name register of the platform’, but failed to mention the offline campaigning activities. The updated Article 10(4) in the enacted version clarifies the nature of IIOLs as an online intermediary, which is proscribed from offline business unless permitted otherwise.89 Some other changes in the enacted version expand the scope of prohibited activities. One example is Article 10(10). In the draft version, only ‘the investment in the stocks’ is listed as the high-risk investment that is barred from the intermediary service of an IIOL. In the enacted version, the scope of high-risk instatement has been expanded to include the OTC, futures, structured products and other derivatives. These prohibited undertakings reflect China’s policy makers’ intention to refine the business nature of an IIOL as the online information intermediary for alternative micro financing. They also reflect the policy makers’ preference to distinguish the IIOL from other financial intermediaries such as commercial banks, investment funds or equity based crowdfunding platforms. As P2P lending is still at an early phase of development, the list of prohibited activities is probably one of the most advisable approaches to striking a balance between encouraging the innovation of accessible alternative finance and avoiding excessive exposure to industrial risks. The registration and filing system to reduce administrative costs The Measures have adopted a registration and filing system for the IIOLs and their subsidiaries to balance the need to scrutinize market entrants, the need to induce sufficient competition and innovation, and the need to reduce operational compliance costs.90 The Measures mandate that local governments must accept the submitted documents if the procedural requirements are met, and complete the registration process within a time frame as set by local authorities.91 The local governments do not have the power to reject a registration request based on a substantive document review. Hence the successful registration of an IIOL does not constitute an endorsement by the government of the management, compliance and credibility of the registered IIOL.92 The local governments, however, are empowered to assess, rate and classify registered IIOLs into different categories pursuant to a specified guidance on assessment and classification.93 They must publish the information online, including the registration documents, the assessment results and the classifications of IIOLs.94 The approach of the registration and filling system in China is in dramatic contrast to the licensing and authorization system as adopted in other jurisdictions. For example, in the UK, it is mandated that: (1) firms running loan-based crowdfunding platforms from 1 April 2014; or (2) firms that do not hold a consumer credit licence from the Office of Fair Trading (OFT) on 31 March 2014 but intending to engage in the loan-based crowdfunding businesses, must first secure full authorization from the FCA before they may operate in the market.95 When applying for FCA authorization, a firm in the UK must meet several prudential conditions. First, it must submit a suitable and detailed business plan setting out the planned activities and related risks, budget and resources (human, systems and capital); secondly, it must have adequate non-financial resources, ie the management board must have adequate knowledge and experience of financial regulation; thirdly, it must have adequate financial resources, ie must hold minimum amounts of capital to ensure continuity of operations in the case of future financial shocks;96 fourthly, it must have an operational, or close to operational, website to demonstrate how it will operate should the authorization be granted.97 In addition, a firm must have resolution plans in place such that, in the event of the platform failure, loan repayments will continue to be collected and the loan will be managed until maturity.98 The FCA’s prudential requirements for authorization have extensive effects on the growth of P2P lending platforms in the UK. The direct result is the growing backlog of applications: it was estimated that an applicant had to wait for an average of six months for FCA authorization.99 Consequently, as of July 2016, two years after the introduction of the authorization regime, only 9 firms have been fully authorized to operate loan-based crowdfunding platforms; while 88 applications are still waiting for approval.100 The information disclosure-based approach to enhance investor protection The information disclosure-based approach is one of the regulatory responses to resolve inefficiency and ineffectiveness of conventional command and control regulation.101 Originating from the US federal securities laws, the disclosure-based regulation is one key mechanism to achieve the fair-dealing and anti-fraud regulatory purpose.102 This regulatory approach has already been adopted to regulate P2P lending in other jurisdictions to ensure that investors have access to clear information and to promote effective market competition. For example, the FCA, viewing the investors of the P2P lending business as ‘lacking the knowledge, experience and resources to cope with possible significant losses’,103 has adopted a comprehensive set of information disclosure rules. A P2P lending platform in the UK is required to submit reports to the FCA on a regular basis. The report should include information about financial statements, customer funds status, expected and actual default rates, investment security mechanisms, loan arrangements, complaints and litigation policy and so on.104 China’s new regulatory regime on P2P lending also adhere to the information disclosure-oriented approach to ensure adequate information is available to prospective investors. IIOLs are vested with the duty of obtaining information about lenders, borrowers, risk assessment and rating the results of each financing project.105 They are obliged to take measures to ensure the completeness, accuracy and safety of the disclosed information.106 This information, together with further information about existing financing projects brokered by the IIOLs, must be made available to the public on its online portals.107 To make sure that IIOLs meet the information disclosure duty, the Measures turn to other gatekeepers for their critical disciplinary roles in creating a transparent, open and fair P2P lending business environment. Accordingly, an IIOL must appoint third parties, including an auditing firm, a qualified cyber security firm and a law firm, to assess the information disclosure adequacy, to test and certify the information safety of the online platform, to verify the compliance level of the business operation.108 IIOLs are required to circulate regulators with third-party reports and assessment results, and make them accessible to the public.109 The third-party gatekeeper-based approach to mitigate industrial risks The P2P lending industry in China has produced various mutations in its business models.110 Many P2P lending platforms have, to varying degrees, been evolving to quasi- financial institutions engaged in credit intermediary services, including directly providing securities guarantees to investors, inappropriately gathering client funds, or intentionally appropriating pooled capital for other use.111 They have thus veered from the primary roles in brokering online lenders and online borrowers. To mitigate financial risks, on one hand, the Measures prohibit P2P lending platforms from excessive undertakings;112 on the other hand, the Measures strengthen the roles of third-party gatekeepers113 to interdict misconduct of the P2P lending platforms. The previous section has discussed the roles of auditing firms, cyber security firms and law firms in verifying compliance with information disclosure/securities standards or procedures. The following section will interrogate how the Measures mandate another two gatekeepers in their roles of assuring the reliability and sustainability of investment in the P2P lending market. Third-party guarantee arrangement In order to attract investment, the P2P industry has resorted to guarantees as a collateral mechanism to ensure the delivery of yield and repayment of a loan. Previously, as common practice, the guarantees are tendered either by a third party such as a financing assurance company, or by a P2P lending platform itself. By acting as a guarantor, a P2P lending platform directly engages itself into the private lending agreement as a contractual party. This undertaking essentially transfers a P2P lending platform from an information intermediary to a credit intermediary, and exposes a P2P lending platform to collateral liability and credit risks in case of loan defaults.114 Having refined a P2P lending platform as an information intermediary, the Measures consistently bar a P2P lending platform, and its related firms, from providing the guarantee to borrowers as the collateral arrangement for brokered loans.115 The Measures now permit only a guarantee by a third-party enterprise, by which P2P lending platforms are severed from collateral arrangements and potential credit risks of lending defaults. It represents the policy to balance the need to protect investors’ interests and platforms’ neutrality.116 However, overreliance on the collateral arrangements provided by third-party enterprises also bears intrinsic risks. From a behavioural economics point of view, public investors, guaranteed repayments by collateral arrangements, have less motivation to screen borrowers and their financing projects. Meanwhile, a guarantee company tends to provide services to a large number of investors dispersed throughout the nation. Without regulation, the credit risks might be disproportionally accumulated and concentrated on the third-party guarantee companies, causing the potential risk of a nation-wide systemic crisis.117 The regulation for the third party guarantee companies, however, is left out from the Measures.118 The current national rules regulating guarantee companies are to be found under the Interim Measures for the Administration of Financing Guarantee Companies (Interim Measures), which was enacted in 2010 by a consortium of Ministries.119 The current Interim Measures, however, do not apply to the P2P lending industry but only to the banking industry.120 Set to replace the Interim Measures, a draft version of the Administrative Measures for the Financing Guarantee Companies was distributed by the State Council for comments and consultations in August 2015.121 The draft version has extended the previously narrow regulatory scope to third party guarantee companies for P2P lending business.122 We will have to wait for the promulgation of the final confirmation. The third-party depositor and custodian scheme As one of the key restrictions under the negative list, an IIOL is now barred from directly or indirectly holding and gathering client money as solicited via the online portals.123 The purpose of this restriction is to segregate the client fund from an IIOL, to prevent an IIOL from the establishment of a capital pool, and to eschew the fraud, embezzlement or misappropriation of the client capital. To achieve this policy purpose, the Measures introduce the so-called third-party depository and custodian scheme.124 Many third-party payment companies working closely with P2P lending platforms have been hoping to win the right to serve as custodians for the funds that investors deposit on the platforms.125 However, it is qualified banks which are granted the privilege by the Measures as the third-party depository financial institutions.126 It is mandated that depository contracts must be signed among lenders, borrowers, IIOLs, the entrusted banking institutions and guarantees. It must be clarified, in the Depository Contracts, that the entrusted banking institutions are the agencies responsible for holding, managing, and transferring the P2P funds between lenders and borrowers.127 P2P platforms in the UK are also obliged to conform to the so-called Client Money Rules to separate all client money from the firm’s own funds.128 The Client Money Rules, inter alia, bar the co-mingling of client monies, demand clear and transparent holding of client monies. The CASS 7.13, for example, prescribes specifically how Client Money ought to be separated, as well as guidelines on how to submit client money and asset return statements. Comparatively, the Measures have only mandated, as a general principle, the third-party depository scheme for the management of client fund. To implement this general principle, the CBRC in August 2016, shortly after the enactment of the Measures, circulated the draft Guidance for the Depository Scheme for the P2P Lending Business (Draft Guidance) for consultations and comments.129 Among other areas, the Draft Guidance clarifies that a qualified third-party banking institution must have established a well-functioning operating system to provide designated accounts for entrusting IIOLs, lenders, borrowers and other relevant parties. All designated accounts must be clearly segregated from each other.130 In addition, the entrusted third-party banking institution must serve as the last and sole custodian. They must not outsource the depository service or cooperate with another party to provide the service.131 The strict and clear segregation of clients’ funds from IIOLs’ is necessary and timely, if not too late. As revealed in many high-profile cases in China, the unrestricted access to investors’ fund by an online platform or its related companies has induced the collapse of many IIOLs, and the failure of investors' protection.132 Clearly, the draft Guidance has implemented stringent rules to ensure that accounts holding client funds are segregated form a platform’s own accounts; these accounts must be managed independently by qualified third-party banking institutions. We will have to wait for the enactment of the Guidance to review the formal third-party depository scheme in full. 5. Unresolved regulatory challenges As the first comprehensive regulatory initiative, the Measures have prescribed rather sophisticated rules to ensure a controlled innovation of the P2P lending industry. The Measures, however, have also left some regulatory cloud. Several critical issues are to be clarified with implementing guidance. As discussed in the previous sections, several pieces of implementing guidance on matters such as the information disclosure and the third-party depository scheme, are to become effective soon. A few other vital matters have not been dealt with by the Measures. The regulatory gap might jeopardize the sustainable development of the P2P lending market. This section addresses two vital unresolved challenges: the first is the regulatory inconsistency with the existing rules for cracking down on illegal fund-raising activities; the second is the regulatory absence governing conflicts of interest and the resolution of disputes. Inconsistency of rules governing illegal fund-raising activities The current regulatory framework in China is rather repressive towards public financing business. A public financing business must be conducted strictly in accordance with relevant law and regulations, or it would be classified as an illegal fund-raising activity and subject to severe sanctions by the criminal law.133 The current Criminal Act prescribes several crimes involving illegal fund-raising activities.134 Violators are subject to draconian criminal sanctions ranging from fines to a life sentence in prison. In fact, it was only until the 2015 XI Amendments to the Criminal Law that the death penalty was removed as the maximum penalty for the crime of fraudulent fund raising.135 It is worth noting that the operation and promotion of public financing business is commonly regulated in many other advanced markets such as the UK. The Financial Services and Markets Act 2000 (FSMA) mandates the pre-approval requirement for establishing and operating the so-called collective investment scheme (CIS).136 As a general prohibition, no person shall promote a CIS to the general public without authorization or exemption.137 In one recent case involving a land banking scheme which led to 110 investors losing over £4.3 million, five individuals were found to be in breach of the above general prohibition for their roles in unauthorized collective investment schemes. As a consequence, they were sentenced to a total of 26 years’ immediate imprisonment.138 The nature of P2P lending is public financing: a borrower publicly solicits funds from a crowd of unspecific lenders; while a lender normally diversifies his/her capital to a group of borrowers. P2P lending hence provides fertile ground for illegal fund-raising activities. In fact, the People’s Bank of China in 2013 has warned of epidemic illegal fund-raising activities involved in the P2P lending business.139 Statistically, the crime of illegal absorption of public deposits and the crime of fraudulent fund raising have been found to be the two most commonly indicted illegal fund-raising activities in P2P lending market. According to a recent survey, 12 criminal cases involving P2P platforms have been trialled and concluded. Among them, 6 cases were charged with the crime of illegal absorption of public deposits, another 5 cases with the crime of fraudulent fund raising.140 The provisions under the Measures have not been consistent with the existing draconian rules on illegal fund-raising activities. Take the crime of illegal absorption of public deposits, for example. Illegal absorption of public deposits refers to undertakings of ‘illegally taking deposits from public or such an equivalent activity’.141 These undertakings are subject to criminal sanctions if any of following criteria are reached: (i) the amount of deposits involved exceeding CNY 200,000 (when the undertaker is an individual) or CNY 1,000,000 (when the undertaker is a firm); (ii) the number of depositors involved exceeding 30 (individual), or 150 (firm); or (iii) the direct economic loss exceeding CNY 200,000 (firm), or CNY 500,000 (firm).142 The Measures adopt the loan cap mechanism for P2P lending, which is consistent with the aforementioned first criteria.143 Nevertheless, the Measures have no provisions concerning the other two scenarios. The lack of clarification could subject the users of P2P lending platforms to the constant threat of criminal sanctions for the ‘illegal absorption of public deposits’. In addition, an individual or an entity which has aided illegal fund-raising from the public and charged fees, including but not limited to agent fees, rewards, rebates and commission, could be prosecuted as an accomplice to the crime of illegal fund-raising.144 Hence, P2P platforms are also under the threat of the ‘Damocles Sword’—the harsh criminal sanctions for illegal fund-raising activities. The Measures’ lack of clarification as to both caps on the number of lenders or the amount of loss can be explained by the fact that the policy makers have concluded the inadvisability of introducing both caps to P2P lending practices. To restrict the number of lenders would compromise the essential feature of P2P lending as public financing. It would also discourage the diversification of investment which could increase the potential loan failure costs borne by each investor.145 To resolve this regulatory inconsistency would require legislative coordination. The current primary rules governing the illegal fund-raising activities are set out by the Supreme People’s Court back in 2010. These rules are clearly too stringent and rather obsolete. The Supreme People’s Court should adapt its judicial interpretations to avoid imposing unnecessary regulatory obstacles on the bourgeoning P2P lending innovation. Absence of rules governing dispute resolution and conflicts of interest Disputes among lenders, borrowers and/or online portals are altogether pervasive in the P2P lending industry in China. As the retrieved data demonstrates, nearly half of the operating P2P platforms in China have recorded at least one of the following disputes: termination of operation, failure to cash out, cheating, loss of contact, police interference or platform shutdown.146 The Measures have not addressed these pervasive issues in full. The Measures only clarify who are the authorities to receive a complaint arising out of the P2P lending disputes.147 No rules are provided regarding how to report, to handle complaints or to resolve disputes. Neither is there an indication under the Measures that further supplementary guidance will be made to address this matter. In comparison, the FCA has prescribed detailed rules under the Dispute Resolution: Complaints on how to handle, report and communicate complaints against the platform and/or its staff members.148 For example, the P2P lending platforms are required to, among other duties, clearly communicate their complaints procedure on their sites and direct complainants to the Financial Services Ombudsman in the event of dissatisfaction. In addition, the FCA in its Conduct of Business Sourcebook has prescribed specific recovery procedures in case of a default of a P2P lending agreement.149 In the future revision, the Measures should adopt a similar regime. A firm operating P2P business should be mandated to publish on its online portal comprehensive policy documents, for both users and staff, to set out how complaints should be processed. Firms should also be required to have Wind-down plans or other resolution plans in place so that, if a P2P platform collapses, loan repayments will continue to be administered and investors should not lose their investment. Another vital matter which the Measures have not addressed is how to regulate scenarios of conflicting interests among relevant parties. The Measures only stipulate that the directors, supervisors, and other senior managers should act with due diligence when disclosing information.150 Comparatively, the FCA mandates a firm engaging P2P lending business to take ‘all reasonable steps’ to identify conflicts of interests: (1) between the firm, including its managers, employees and appointed representatives (or where applicable, tied agents), or any person directly or indirectly linked to them by control, and a client of the firm; (2) between one client of the firm and another client.151 The FCA goes further and sets a regulation on suggesting the contents of a conflicts of interest policy (SYSC 10.1.10). P2P lending platforms are required to draft a Conflicts of Interest Policy and Process document which identifies: ‘potential conflicts, the actions it will take and a means by which staff may highlight potential conflicts of interest to senior manages.’152 In a future revision, the Measures should also mandate clearly that a P2P operator must establish a policy framework to set out procedures to effectively and efficiently identify and address potential conflicts of interest. The policies and procedures should be published on the online portals to enable external investors and market regulators to assess and to mitigate these conflicts once they emerge. 6. Conclusion Capital is said by a Quarterly Reviewer to fly turbulence and strife, and to be timid, which is very true … With adequate profit, capital is very bold. A certain 10 per cent will ensure its employment anywhere; 20 per cent certain will produce eagerness; 50 per cent, positive audacity; 100 per cent will make it ready to trample on all human laws; 300 per cent., and there is not a crime at which it will scruple, nor a risk it will not run, even to the chance of its owner being hanged …153 As proclaimed by Thomas Dunning and endorsed by Karl Marx, a high rate of profits would entice excessive capital mobility and likely induce extravagant risks. The explosive growth of the P2P lending sector in China sets a good example. The high yield rate of more than 10 per cent of capital investment in the P2P lending industry, alongside the regulatory arbitrage and other market forces, has fostered the unparalleled growth of the P2P lending market in China. The unparalleled growth has rendered a favourable alternative financing option to the under-supplied financial market consumers: the SMEs and individual households. It has also encouraged innovative entrepreneurship and imposed competitive pressure on the traditional financial industries to revamp their conventional financial products and services. Nevertheless, this explosive growth has triggered growing concerns over systematic financial risks, increasing market failures and potential social unrest. The widespread problematic P2P lending platforms and high profile collapsed platforms have transformed the P2P lending industry in China to ‘the elephant in the room’ for Chinese policy makers. Proactive approaches are urgently needed to mitigate extravagant risks incurred in the P2P lending market while not to jeopardize the financial technology innovation of this young industry. It is against this backdrop that the Measures, incorporating several innovative regulatory approaches that are enacted with the purpose of providing an optimal regulatory regime for the sustainable growth of the P2P lending market in China. The newly established regime is a welcome regulatory development. It not only provides comprehensive legal protection for participants in the P2P lending market in China; but also contributes a new model to the global regulatory map for the sustainable growth of the P2P industry. The new regulatory regime represents a pivotal change leading to a regulatory paradigm shift from light regulation to tight regulation. The rules of the game for the P2P lending industry in China have changed. Many of the existing P2P lending platforms will have difficulty meeting the compliance requirements as set out by the new regulatory regime. For example, a recent survey indicates that only 27 per cent of the P2P lending platforms meet the requirement to cap loans at CNY 200,000 for each individual borrower.154 To take another example, as of 19 October 2016, two months after the enactment of the Measures, there had been only 71 platforms which have established a third-party depository scheme with custodian banking institutions, to comply with the fund segregation requirements.155 This fraction of platforms merely account for approximately 1.74 per cent of the existing P2P lending platforms (4072 platforms were recorded as of September 2016, see Figure 1). To avoid harsh impacts on the P2P lending industry, the Measures allow a 12-month grace transitional arrangements for the market. During the transition period, firms engaging in P2P lending activities must adapt their business operations to the new regime. It is likely that many existing platforms will either be shut down, or bought out by stronger competitors. The raised compliance costs will also deter new players from entering the market. Consolidation of the industry will be inevitable. However, the far-reaching effects of the new regulatory regime can only be assessed in full after the transitioning period. Footnotes 1 Douglas W Arner et al. The Evolution of Fintech: A New Post-Crisis Paradigm?, University of Hong Kong Faculty of Law Research Paper No. 2015/047; UNSW Law Research Paper No. 2016-62. Available at SSRN: <https://ssrn.com/abstract=2676553> accessed 1 October 2016. Douglas W Arner et al., ‘FinTech, RegTech and the Reconceptualization of Financial Regulation’, Northwestern Journal of International Law & Business, Forthcoming; University of Hong Kong Faculty of Law Research Paper No. 2016/035. Available at SSRN: <https://ssrn.com/abstract=2847806> accessed 1 October 2016. See also, Iris H-Y Chiu, The Disruptive Implications of Fintech-Policy Themes for Financial Regulators, available at SSRN: <https://ssrn.com/abstract=2812667 or http://dx.doi.org/10.2139/ssrn.2812667> accessed 21 July 2016. 2 Art 3, the 2015 Guiding Opinions on Promoting the Healthy Development of Internet Finance, China Banking Regulatory Commission, et al. An elaborated discussion of the Guiding Opinions appears below in the section ‘First, the Precursory Regulatory Attempt’. 3 The transaction volume in China recorded about CNY 638.79 billion (or USD 101.7 billion) in 2015. The figure in the USA is USD 36.49 billion; in the UK, it is GBP 3.2 billion. For a survey of the FinTech development in the Asia Pacific region, see: Harnessing Potential: The Asia Pacific Alternative Financing Benchmarking Report (Cambridge Centre for Alternative Finance 2016). For the American market: Breaking New Ground: The Americas Alternative Finance Benchmarking Report (Cambridge Centre for Alternative Finance, April 2016). For the UK market: Pushing Boundaries: The 2015 UK Alternative Finance Industry Report (Cambridge Centre for Alternative Finance, February 2016). 4 About USD 97.58 billion out of the USD 101.7 billion alternative finance market volume is registered with the P2P lending sector in 2015. Harnessing Potential (n 3). Other sectors such as online payments and sales of investment products are also leading the FinTech innovation in China. Office, The UK Foreign & Commonwealth, Financial Services Special Report: China’s Fintech Market (July 2016) 1. 5 The reason to adopt Online Marketplace Lending, according to the US Department of Treasury, is that the products and business models of online lending have now evolved, the investor base has expanded from individuals to institutional investors, hedge fund and financial institutions. Hence it is ‘no longer accurately described as a “peer-to-peer” market’. White Paper on Online Marketplace Lending: Opportunities and Challenges in Online Marketplace Lending (May 2016) 5. 6 FCA, The, A Review of the Regulatory Regime for Crowdfunding and the Promotion of Non-Readily Realisable Securities by Other Media (February 2015) note 2. 7 For a general review, The Business Models and Economics of Peer-to-Peer Lending (European Credit Research Institute, No 17/ May 2016). Also Alexander Bachmann et al., ‘Online Peer-to-Peer Lending—A Literature Review’ (2011) 16 J Internet Banking Commerce 1. 8 White Paper on Online Marketplace Lending: Opportunities and Challenges in Online Marketplace Lending (May 2016). Commission Staff Working Document on Crowdfunding in the EU Capital Markets Union (May 2016). Pushing Boundaries (n 3). The Business Models (n 7). See also below in the section ‘Prime position of the P2P Lending Industry’ for a discussion of the growth of P2P lending industry, in China and in other jurisdictions. 9 Jack R Magee, ‘Peer-to-Peer Lending in the United States: Surviving After Dodd-Frank’ (2011) 15 North Carolina Banking Institute 139. 10 FCA, The, Policy statement 14/4, The FCA’s Regulatory Approach to Crowdfunding over the Internet, and the Promotion of Non-Readily Realisable Securities by other Media (March 2014). FCA, The, A Review of the Regulatory Regime for Crowdfunding and the Promotion of Non-Readily Realisable Securities by Other Media (February 2015). 11 See also Robert Wardrop & Tania Ziegler, ‘A Case of Regulatory Evolution—A Review of the UK Financial Conduct Authority’s Approach to Crowdfunding’ (2016) 14 CESifo DICE Report 23. William Warren, ‘The Frontiers of Peer-to-Peer Lending: Thinking About a New Regulatory Approach’ (2016) 14 Duke Law & Technology Review 298. 12 The other two main missions of the P2PFA include: (a) to seek to secure public policy, regulatory and fiscal conditions that enable the UK-based peer-to-peer finance sector to compete fairly and grow responsibly; (b) to raise awareness and understanding of the benefits and risks of peer-to-peer finance (c) See further information at the official website of the P2PFA: <http://p2pfa.info/about-p2p-finance> accessed 01 November 2016. 13 See in general, Benjamin Lo, ‘It Ain't Broke: The Case for Continued SEC Regulation of P2P Lending’ (2016) 6 Harvard Business Law Review 87. Warren (n 11) 298. Magee (n 9). Andrew Verstein, ‘The Misregulation of Person-to- Person Lending’ (2011) 45 UC Davis Law Review 445. 14 The jurisdiction of the SEC over the P2P lending in the USA started in 2008, when one of the main P2P platforms, Prosper.com, was issued a Cease and Desist Order by the SEC. For further discussion on the regulatory structure of the USA, see eg, Verstein (n 13). Magee (n 9). 15 In addition to registering its securities under the Securities Act, P2P platforms must register their securitized loans in every State in which the securitized loans are offered for sale to the public unless an exemption from registration applies. 16 The Regulation of Marketplace Lending: A Summary of the Principal Issues (2015 Update). (Chapman and Cutler LLP, April 2015). 32. 17 The CFPB was established by the 2010 Dodd–Frank Act. Eric J Mogilnicki and Melissa S Malpass, ‘The First Year of the Consumer Financial Protection Bureau: An Overview’ (2013) 68 The Business Lawyer 557. Elizabeth Warren, ‘Unsafe at Any Rate: If It’s Good Enough for Microwaves, It’s Good Enough for Mortgages: Why We Need a Consumer Financial Product Safety Commission’ (2007) 7 DEMOCRACY: A Journal of Ideas 8. See also Warren (n 11). 18 Shen Wei, ‘Internet Lending in China: Status Quo, Potential Risks and Regulatory Options’ (2015) 31 Computer Law Security Review 793. 19 For example, Provisions of the Supreme People’s Court on Certain Issues concerning Application of Law in Trial of Cases involving Private Lending (Fa Shi [2015] No18); and Judicial Interpretations on Several Issues Concerning Implementation of Laws in Trial of Criminal Cases Relating Illegal Fundraising (Fa Shi [2010] No18). For a general discussion of the pre-existing provisions on the P2P lending: Shen Wei, ‘Designing Optimal Regulation for Financial Innovation in Capital Raising—Regulatory Options for China’s Peer-to-Peer Lending Sector’ (2016) 31 Banking & Finance Law Review 539. Yao Haifang et al., Chapter 4: Study on P2P Lending Regulation, in Renmin Chinese Law Review: Selected Papers of The Jurist (Jichun SHI ed 2015). Wei (n 18). Zhiyao Wang, ‘P2P Lending: Demand for Administrative Supervision and Reflection from Criminal Law’ (2015) 2 Oriental Law () 99. 20 There is further discussion below in the section ‘Propulsion of the P2P Lending Growth’ and section ‘Peril of the P2P Lending Market’. 21 The State Council of Peoples’ Republic of China, Press Release on The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries, 24 August 2016, <http://www.gov.cn/xinwen/2016-08/24/content_5102029.htm> accessed 01 October 2016. 22 The PPDai.com was mainly modelled on Prosper.com’s pure intermediary business model, whereby the platform handles the servicing of the loan on behalf of the matched borrowers and investors. See also Alec Macfarlane, Chinese Peer-to-Peer Lender Ppdai.com Plans U.S. IPO, The Wall Street Journal, 18 October 2016 . Available at <http://www.wsj.com/articles/chinese-peer-to-peer-lender-ppdai-com-plans-u-s-ipo-1476786906> accessed 20 October 2016. 23 The FCA, Call for Input to the Post-Implementation Review of the FCA’s Crowdfunding Rules, July 2016, s 1.18. 24 Pushing Boundaries (n 3). 25 Commission Staff Working Document on Crowdfunding in the EU Capital Markets Union (May 2016). 26 Breaking New Ground (n 3). 27 An IMF financial repression index measuring the extent of policy distortions in restricting market-based movement of the interest rate, exchange rate and funds, concluded that China is one of countries which has the most severe financial policy distortion. Abdul Abiad et al., A New Database of Financial Reforms (The International Monetary Fund 01 Dec. 2008). 28 Yiping Huang et al., Can the Internet Revolutionise Finance in China?, in China's New Sources of Economic Growth: Vol 1: Reform, Resources and Climate Change (Garnaut, Ross et al. eds, 2016). 29 The return peaked at 30 per cent in the middle of 2013. For the first time, the monthly average return has now reached its lowest, 9.83 per cent in September 2016. Data available at <http://shuju.wdzj.com/industry-list.html>. 30 P2P lending = the composite investors’ interest rates in all P2P platforms; Yu’ebao = online investment fund rate managed by Alibaba; WenZhou private lending = a representative lending rate of informal finance in China; Central Bank bill three months = rate of three-month bill from PBC; Shibor = weekly Shanghai Interbank Offered Rate. Yiping (n 28) (Garnaut, Ross, et al. eds., 2016). 31 Martin Chorzempa, P2P Series Part 1: Peering Into China’s Growing Peer-to-Peer Lending Market, Peterson Institute for International Economics (27 June 2016), available at <https://piie.com/blogs/china-economic-watch/p2p-series-part-1-peering-chinas-growing-peer-peer-lending-market#_ftnref5> accessed 1 November 2016. 32 Source: Internet Live Stats <http://www.internetlivestats.com/internet-users/> accessed 01 October 2016. 33 Online shopping in China has become a new phenomenon, as evidenced by the recent so called ‘Single Day Festival’ sale frenzy. See, eg, Cheang Ming, Singles' Day: Alibaba smashes records at world's largest online shopping event, CNBC, 11 Nov 2016. Available at: <http://www.cnbc.com/2016/11/11/singles-day-news-alibaba-poised-to-smash-records-at-worlds-largest-online-shopping-event.html> accessed 15 November 2016; Sherisse Pham, Alibaba's Singles Day: World's Biggest Shopping Bonanza Sets New Record, CNN, 11 Nov 2016. Available at: <http://money.cnn.com/2016/11/10/technology/alibaba-singles-day-shopping-festival-breaks-records/> accessed 15 November 2016. 34 Alipay has 451 million annual active users, while PayPal has about 180 million. Ant Financial to Evolve Into A Global Leading Fintech Company <http://www.alibabagroup.com/en/ir/pdf/160614/12.pdf 2016> accessed 01 October 2016. 35 Alibaba Group Holding Limited is the world’s largest retail platform. It, inter alia, operates the world's largest online business-to-business trading platform for small businesses (Alibaba.com); China’s largest consumer-to-consumer online shopping platform (Taobao.com); China’s largest business-to-consumer online shopping platform (Tmall.com), etc. 36 Huang et al. (n 28). 37 See also Melanie Lee, China's Nearly 700 Million Internet Users Are Hot For Online Finance, The Forbes, 25 Jan 2016. Available at: <http://www.forbes.com/sites/melanieleest/2016/01/25/chinas-nearly-700-million-internet-users-are-hot-for-online-finance/#33eaeba41391> accessed 05 October 2016. 38 Huang et al. (n 28). 39 Section 2, Implementation Opinions of the General Office of the State Council on Providing Financial Support for the Development of Small and Micro Enterprises, No 87 [2013] of the General Office of the State Council. The policy makers’ stance towards the P2P lending industry can also be found by their light regulatory approach toward other sectors of FinTech industry. For instance, trade and manufacturing companies are rarely granted finance-related operating licences in many jurisdictions. In China, however, e-commerce firms including Alibaba and Jingdong, or social media firms including Tencent, have been granted to entry into the online financial service market. Arner et al.(n 1). 40 Several Opinions of the State Council on Promoting Information Consumption and Boosting Domestic Demand (Documents of the State Council [2013] No 32). 41 Section 8, Guiding Opinions on Promoting the Healthy Development of Internet Finance 2015, Yin Fa [2015] No 221. 42 Further discussion on the Guiding Opinions is undertaken in the following section ‘First, the Precursory Regulatory Attempt’. 43 Xue Lei, ‘Discussion of the Risks and Risk Control of P2P in China’ (2016) 7 Modern Economy 399. Jianjun Li et al., ‘Risks of P2P Lending Platforms in China: Modeling Failure Using a Cox Hazard Model’ (2016) 49 The Chinese Economy 161. 44 Neil Gough, Online Lender Ezubao Took $7.6 Billion in Ponzi Scheme, The New York Times, 1 Feb 2016. Available at: <http://www.nytimes.com/2016/02/02/business/dealbook/ezubao-china-fraud.html?_r=1> accessed 05 September 2016. 45 Tom Mitchell, Arrests in China over $7.6bn Ponzi scheme, Financial Times, 1 Feb 2016. Available at: <https://www.ft.com/content/4ca011f4-c88f-11e5-a8ef-ea66e967dd44> accessed 05 September 2016. 46 Press Release, the Beijing People’s Procuratorate, No 1 Branch, 15 August 2016, available at: <http://www.bjjc.gov.cn/bjoweb/gsgg/89278.jhtml> accessed 05 September 2016. See also, Brenda Goh, China Calls for Crackdown on Illegal Fundraising Platforms, Reuters, 4 Feb 2016. Available at: <http://www.reuters.com/article/us-china-fraud-finance-idUSKCN0VE05R> accessed 05 September 2016. 47 A platform is identified as problematic if it records at least one of the following difficulties: termination of operation, failure to cash out, cheating, loss of contact, police interference or platform shutdown. Huang et al. (n 28). 48 See also Huang et al. (n 28). 49 They are, the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry of Finance, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Insurance Regulatory Commission, the China Internet Information Technology Office and the Legislative Affairs Office of the State Council. 50 s 1, the 2015 Guiding Opinions on Promoting the Healthy Development of Internet Finance. 51 ss 7–12, ibid. 52 s 13, ibid. 53 s 19, ibid. 54 s 8, ibid. 55 The P2P lending businesses, for example, are subject to the Provisions of the Supreme People’s Court on Certain Issues concerning Application of Law in Trial of Cases involving Private Lending (Private Lending Provisions) issued by the Supreme People’s Court on 6 August 2015. 56 Art 2(1), the Measures. The Measures do not apply to the establishment of financial guarantee companies, small loan companies and other financial companies. art 42, ibid. 57 Art 2(2), ibid. 58 Art 2, ibid. 59 Art 3(1), ibid. A complete list of prohibited services is prescribed under article 10, ibid; see further discussion in the section ‘The Negative List Based Approach to Curtail Administrative Costs’ below. 60 On 23 June 2015, the Supreme People’s Court released the Provisions on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases. Among others, art 22 differentiates between P2P platforms functioning as an information intermediary and those acting as a credit intermediary. When a P2P platform merely acts as an information intermediary, the Court would not apply a joint liability to the borrower and the platform. Otherwise, joint liability is applicable where the P2P platform acts as a credit intermediary asking for collateral to a loan. 61 Lo (n 13). 62 Art11, the Measures. 63 Art 14, ibid. 64 Art 15, ibid, 65 Arts 12–13, ibid. 66 Dan Awrey, ‘Law and Finance in the Chinese Shadow Banking System’ (2015) 48 Cornell International Law Journal 1. Yunlin Lu et al., ‘Shadow Banking and Firm Financing in China’ (2015) 36 International Review of Economics & Finance 40. Jianjun Li et al., ‘Shadow Banking in China: Institutional Risks’ (2014) 31 China Economic Review 119. See also in general: Shen Wei, Shadow Banking in China: Risk, Regulation and Policy (Edward Elgar Publishing 2016). 67 Harnessing Potential (n 3) 37. 68 Art 17(1), the Measures. 69 Art 17(2), ibid. 70 The CBRC & the MIIT, Press Release on The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries, 25 August 2016, s 2, available at: <http://www.miit.gov.cn/n1146295/n1652858/n1653018/c5218820/content.html> accessed 01 October 2016. 71 Art 4, the Measures. 72 Art 33(1), ibid. 73 Art 33(2), 39, ibid. 74 Huang et al. (n 28). 75 For example, Yirendai.com, one of China’s leading P2P lending platforms, has been listed on the NYSE and open to the global investors since 18 December 2015. See Yirendai (NYSE: YRD) Celebrates Initial Public Offering on NYSE, available at <https://www.nyse.com/events/2678265201/Yirendai-NYSE-YRD-Celebrates-Initial-Public-Offering-on-NYSE> Another platform, PPdai, is currently seeking IPO in the USA. Alec Macfarlane, Chinese Peer-to-Peer Lender Ppdai.com Plans U.S. IPO, The Wall Street Journal, 18 October 2016. Available at <http://www.wsj.com/articles/chinese-peer-to-peer-lender-ppdai-com-plans-u-s-ipo-1476786906> accessed on 20 October 2016. 76 Financial Times, Arrests in China over $7.6bn Ponzi scheme: Scam involving P2P lender allegedly defrauded almost 1m investors, 1 February 2016, available at: <https://www.ft.com/content/4ca011f4-c88f-11e5-a8ef-ea66e967dd44> accessed 01 October 2016. 77 The issuance of the ICP licence is subject to the rules under The Administrative Measures for the Licensing of Telecommunication Business Operations prescribed by the Ministry of Industry and Information Technology in 2009. 78 Art 4, the Measures. 79 Art 34, ibid. 80 See above notes 13–15 and accompanying text. See also, Verstein (n 13). 81 Art 2, the Securities Act 2014. 82 The CBRC & the MIIT, Press Release on The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries, 25 August 2016, s 6, available at: <http://www.miit.gov.cn/n1146295/n1652858/n1653018/c5218820/content.html> accessed 01 October 2016. 83 The Shanghai Pilot Free Trade Zone was officially launched in September 2013. It is not a traditional ‘free trade area’; instead, it is more like a trial arena for China’s new round of opening and reform strategy. Within this Zone, a set of innovative measures and procedures were explored and implemented with the liberalization of the capital and the facilitation of trade as the main objectives. See further discussion on the background and development of the Free Trade Zone at: Daqing Yao & John Whalley, ‘The China (Shanghai) Pilot Free Trade Zone: Background, Developments and Preliminary Assessment of Initial Impacts’ (2016) 39 The World Economy 2, Paul Kossof, ‘China's Pilot Free Trade Zone: Shanghai Free Trade Zone and the Potential Future of Free Trade Zones in Mainland China’(2014) 1 International Journal of Law and Legal Jurisprudence Studies 1. 84 Wei Shen & Matthias Vanhullebusch, ‘Where Is the Alchemy? The Experiment of the Shanghai Free Trade Zone in Freeing the Foreign Investment Regime in China’ (2015) 16 European Business Organization Law Review 321. 85 This pilot mechanism has now been incorporated into the most recent amendments to the nationwide foreign investment laws in China, according to which the existing approval requirements will be replaced by the filing procedure from October 2016. The 22nd Session of the Standing Committee of the 12th National People's Congress of the People's Republic of China, The Decision of the Standing Committee of the National People’s Congress on Amending Four Laws including ‘The Law of the People's Republic of China on Wholly Foreign-Owned Enterprises’ (President of the People's Republic of China (ed.), 03 September, 2016). Available at <http://cpc.people.com.cn/n1/2016/0905/c64387-28690242.html> accessed 09 September, 2016. 86 It is not permitted to conduct offline activities, unless for purposes of mitigating risks such as collecting and evaluating information, tracking the usage of the loans, managing mortgages and charges, or other necessary measures, art 16, the Measures. 87 The prohibited debt transference activities include packaged assets, securitized assets, entrusted assets, and fund shares, art 10 (8), ibid. 88 The China’s regulatory regime over the equity crowd-funding sector is in the process of becoming established. The Securities Association of China, the self-regulatory body of the securities market in China, published in December 2014 a draft code titled ‘Rules on Equity Crowd-Funding’ soliciting comments. See further at <http://www.sac.net.cn/tzgg/201412/t20141218_113326.html> accessed 10 September 2016. 89 See above footnote 86 and accompanying text. 90 The CBRC, Legislative Explanations of Key Questions Regarding the Draft Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries, 28 December 2015, s 6. Available at: <http://www.gov.cn/xinwen/2015-12/28/content_5028564.htm> accessed 01 October 2016. 91 Art 5 (2), the Measures. 92 Art 5, the Measures. 93 The specified guidance is due to be issued soon. art 5(5), ibid. 94 Further discussion of the information disclosure is undertaken in the section ‘The Information Disclosure Based Approach to Enhance Investor Protection’ below. 95 A crowdfunding firm holding an appropriate OFT licence before March 2014 was allowed to continue its crowdfunding business with an interim permission. Having an interim permission allows these firms to remain in the market pending application for full authorization. s 2.10, The FCA, PS14/4, The FCA’s Regulatory Approach to Crowdfunding Over the Internet. 96 Until 31 March 2017, the financial resources requirement is the higher of: 1. a fixed minimum amount of £20,000, or 2. a volume-based amount calculated as the sum of the following amounts of loaned funds outstanding: (a) 0.2 per cent of the first £50m (b) 0.15 per cent of the next £200m (c) 0.1 per cent of the next £250m, and (d) 0.05 per cent of any remaining balance above £500m The fixed minimum requirement will rise to £50,000 from 1 April 2017. The FCA, Call for Input to the Post-Implementation Review of the FCA’s Crowdfunding Rules, July 2016, s 2.31 97 The FCA, A Review of the Regulatory Regime for Crowdfunding and the Promotion of Non-Readily Realisable Securities by Other Media, s 44, February 2015 98 FCA, The, Policy statement 14/4, The FCA’s Regulatory Approach to Crowdfunding over the Internet, and the Promotion of Non-Readily Realisable Securities by other Media (March 2014) 24. 99 Robert Wardrop & Tania Ziegler, A Case of Regulatory Evolution—A Review of the UK Financial Conduct Authority’s Approach to Crowdfunding, 14 CESifo DICE Report 23(2016). Sean Farrell, Crowdfunders Caught in Logjam for FCA Approval, The Guardian, 9 March 2015. Available at: <https://www.theguardian.com/business/2015/mar/09/crowdfunders-caught-in-logjam-for-fca-approval> accessed 05 October 2016. 100 FCA, The, Call for Input to the Post-Implementation Review of the FCA’s Crowdfunding Rules (July 2016). s 1.18. 101 The conventional command-and-control regulation has been criticized for being ‘economically inefficient and for relying on the effectiveness of the regulator and its staff.’ Further discussion can be found in, eg, Rónán Kennedy, ‘Rethinking Reflexive Law for the Information Age: Hybrid and Flexible Regulation by Disclosure’ (2016) 7 George Washington University Energy and Environmental Law Review 124. 102 Mary Jo White, Chairman’s Address at SEC Speaks—‘Beyond Disclosure at the SEC in 2016’ (19 February 2016), available at <https://www.sec.gov/news/speech/white-speech-beyond-disclosure-at-the-sec-in-2016-021916.html > . Emilios Avgouleas, ‘What Future for Disclosure as a Regulatory Technique? Lessons from Behavioural Decision Theory and the Global Financial Crisis’ in Iain MacNeil & Justin O'Brien, eds, The Future of Financial Regulation. 103 FCA, The, Policy statement 14/4, The FCA’s Regulatory Approach to Crowdfunding over the Internet, and the Promotion of Non-Readily Realisable Securities by other Media (March 2014). s 3.40 104 ibid. s 3.41. 105 Art 30, the Measures. 106 For example, they may vet the borrowers in order to avoid fraudulent transactional information. art 32, ibid. 107 Art 31(1), ibid. 108 Art 31 (3) & (4), ibid. 109 Art 31 (5), ibid. 110 Li et al. (n 43). 111 See also Lei (n 43). 112 As discussed in the above section ‘The Negative List Based Approach to Curtail Administrative Costs’. 113 Ronald J Mann, ‘Regulating Internet Payment Intermediaries’ (2004) 82 Texas Law Review 681. For a general discussion of functions of third-party gatekeepers: eg, Yasuyuki Fuchita & Robert E Litan, Financial Gatekeepers: Can They Protect Investors? (Brookings Institution Press 2006). John C Coffee, Gatekeepers: The Professions and Corporate Governance (Oxford University Press 2006). 114 Art 22, the Provisions on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases, the Supreme People’s Court, 2015. 115 Art 35, the Measures. 116 The State Council of Peoples’ Republic of China, Press Release on The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries, 24 August 2016, s 3. Available at: <http://www.gov.cn/xinwen/2016-08/24/content_5102029.htm> accessed 01 October 2016. 117 See also Wei (n 19). 118 Art 42, the Measures 119 They are the CBRC, the State Development & Reform Commission, the Ministry of Industry & Information Technology, the Ministry of Finance, the Ministry of Commerce, the People’s Bank of China, and the State Administration for Industry & Commerce. 120 Art 2, Interim Measures for the Administration of Financing Guarantee Companies. 121 The full text is available at: <http://www.mofcom.gov.cn/article/b/g/201509/20150901125778.shtml> accessed 01 August 2016. 122 Art 2, Administrative Measures for the Financing Guarantee Companies. 123 Art 10 (2), the Measures. 124 Arts 28 & 35, ibid. 125 Wei (n 18). 126 Art 28, the Measures. 127 Ibid. 128 The Client Money Rules are outlined in the FCA Handbook in the section relating to their Client Asset Sourcebook rules (or CASS) related to ‘adequate protection’. 129 The full text is available at: <http://www.asiafinance.cn/jrzx/59582.jhtml> accessed 20 September 2016. 130 Arts 9 & 10, the draft Guidance for the Depository Scheme for the P2P Lending Business. 131 Art 11 (8), ibid. 132 Gough (n 44). See also Wang (n 19). 133 Sara Hsu, ‘China’s Ongoing Battle with Illegal Fundraising’ (2014) 28 The Diplomat. 134 For examples, the crime of fraudulent issuance of stocks and bonds (art 162), the crime of illegal absorption of public deposits (art 176), the crime of unauthorized issuance of stocks and bonds (art 179), the crime of fraudulent fund raising (art 192), the crime of illegal business operation (art 225), etc. The 1997 Criminal Act. 135 Laney Zhang, China: Death Penalty Crimes to Be Further Reduced, The Library of Congress (22 September 2015), available at <http://www.loc.gov/law/foreign-news/article/china-peoples-republic-of-death-penalty-crimes-to-be-further-reduced/> accessed 15 October 2016. Some commentators appear to miss the recent amendment by stating the illegal fund-raising activities are subject to the death penalty, see, eg Martin Chorzempa, P2P Series Part 1: Peering Into China’s Growing Peer-to-Peer Lending Market, Peterson Institute for International Economics (27 June 2016) <https://piie.com/blogs/china-economic-watch/p2p-series-part-1-peering-chinas-growing-peer-peer-lending-market#_ftnref5> accessed 10 September 2016. 136 ‘Collective investment scheme’ means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. s 235 (1), the FSMA 2000. 137 ss 19, 23(1), and 177(4)(a), the FSMA 2000. 138 [2014] EWCA Crim 1028. 139 The PBOC, Policy Brief on the Illegal Fundraising Activities, the 2013 Meeting of Interagency Anti-Illegal Fundraising Taskforce. Available at: <http://www.sdtvu.com.cn:10136/art/2016/6/1/art_7522_107381.html#_Toc11646> accessed 15 October 2016. Haifang et al. (n 19). 140 Wang (n 19). This online publication is an update of one of the same author’s journal articles: Zhiyao Wang, ‘P2P Lending: Demand for Administrative Supervision and Reflection from Criminal Law’ (2015) 2 Oriental Law () 99. 141 Art 176, the 1997 Criminal Act. 142 Art 3, The Judicial Interpretations (n 19). 143 For an individual borrower, the loan cap is CNY 200,000 from one single P2P platform, or CNY 1 million from multiple of P2P platforms; for an enterprise borrower, CNY 1 million or CNY 5 million, respectively. art 17(2). 144 Art 8(2), The Judicial Interpretations (n 19). 145 Wei (n 19). 146 See further in the section ‘Peril of the P2P Lending Market’ above. 147 Art 29, the Measures. 148 DISP 1.1 - 1.6, Dispute resolution: Complaints, the FCA Handbook. Available at: <https://www.handbook.fca.org.uk/handbook/DISP.pdf>. 149 COBS 14.3.7, Conduct of Business Sourcebook, the FCA Handbook. Available at: <https://www.handbook.fca.org.uk/handbook/COBS.pdf>. 150 Art 32, the Measures. 151 The FCA sets out a list of its perceived scenarios that may give rise to a conflict of interest. These scenarios arise or may arise during the firm providing any service referred to in SYSC 10.1.1 R. 152 The FCA rules require P2P lending firms to notify clients of conflicts of interest which cannot be avoided or addressed. SYS10.1.8. 153 T. J. Dunning, l. c., pp. 35, 36. Quoted by Karl Marx, Capital: A Critique of Political Economy, Volume I, page 540. 154 Dong Jing & Wang Yuqian, P2P Industry Struggles to Conform to New Restrictions (16 November 2016), available at <http://english.caixin.com/2016-11-16/101008181.html?sourceEntityId=101007859> accessed 17 November 2016. 155 ibid. © The Author(s) (2017). Published by Oxford University Press. 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Recent Development of FinTech Regulation in China: A Focus on the New Regulatory Regime for the P2P Lending (Loan-based Crowdfunding) Market

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Abstract

Key points FinTech innovation has thrived in China in the past decade. As one leading sector of FinTech innovation, the P2P lending market has experienced an unparalleled growth in China with the Chinese market acceding to be the largest market in the world. This rapid development, while it satisfies the financing need, has brought about industrial risks and regulatory challenges. This article starts with an empirical survey of the explosive development of the P2P lending industry in China followed by an examination of its underlying economic, institutional and technological driving forces. The second part of this article then turns to inspecting, comparatively, several features of regulatory approaches as adopted by the newly established regulatory regime. The third part interrogates two critical challenges which have not been resolved by the new regulatory regimes. The final part concludes. The tentative conclusion is that the newly established regime is a welcome regulatory development. Not only has it provided comprehensive legal protection for participants of the P2P lending market in China; it may also contribute a new model to the global regulatory map for the sustainable growth of the P2P lending market, and the FinTech industry in general. With adequate profit, capital is very bold. A certain 10 per cent will ensure its employment anywhere; 20 per cent certain will produce eagerness; 50 per cent, positive audacity; 100 per cent will make it ready to trample on all human laws … – T. J. Dunning 1. Introduction FinTech, or what in China is more commonly referred to as Internet Finance, is the alternative finance supplying a wide range of conventional or innovative financial instruments via online marketplace channels. These channels fall outside the traditional avenues of capital raising and financial intermediation.1 Its common characteristic is that ‘traditional financial institutions and Internet companies use Internet technology for: payments, internet lending, public equity financing, internet fund markets, internet insurance, internet trust, consumer finance’.2 In recent years, FinTech innovation in China has witnessed an unprecedented boom, which has transformed China into one of the world’s largest online alternative finance markets by transaction volume.3 Among others, Peer to Peer lending (P2P lending) has been one of the leading sectors of the booming FinTech market.4 P2P lending, also referred to as Online Marketplace Lending in the USA,5 or Loan-based Crowdfunding in the UK,6 is essentially one type of private lending. It is generated in the wake of information technology innovations, in particular, the wide spread of the accessible Internet service. It is a novel financing model which bypasses conventional banking intermediaries by directly connecting borrowers and lenders via online Internet portals.7 The first P2P lending platform in the world, Zopa.com was launched in 2005 in the UK. Since then, the P2P lending business has experienced extraordinary growth and has now developed into a vast global industry.8 The rapid development of the P2P lending industry has not only contributed to the financial markets with innovated products and services, but has also exposed borrowers and lenders to severe market failure. Policy makers face regulatory challenges to strike a balance between ‘sufficient regulation for borrow and lender protection without overburdening the young and emerging industry’.9 Several jurisdictions have responded to these regulatory challenges. In the UK, loan-based crowdfunding activities are currently subject to Article 36 H under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) and other rules as set by the Financial Conduct Authority (FCA).10 Firms engaging in P2P lending need to comply with prudential and other standards affecting their structure and operation as well as business conduct rules affecting their deals with lenders and borrowers.11 In addition to the state regulation, P2P lending activities in the UK are governed by a self-regulatory industry association, the Peer-to-Peer Finance Association (P2PFA). The P2PFA bears the missions of, inter alia, promulgating standards and best practices for its member-firms to ensure the transparent, fair and orderly operation of P2P lending industry.12 In the USA, the regulation of the P2P lending sector involves bifurcated oversight by both federal and state regulators.13 The SEC at the federal level has asserted jurisdiction by demanding firms operating P2P lending platforms to be registered as public companies, which must comply with the reporting requirements pursuant to Section 15(d) of the 1934 Securities Exchange Act.14 The SEC also require P2P loans to be tendered as Platform Notes through a prospectus with an effective registration statement, unless exempted pursuant to Section 5 of the 1933 Securities Act.15 Meanwhile, platforms must comply with the federal Dodd–Frank Act and state laws regarding credit consumer protection. Classified as credit consumers, borrowers of P2P loans should be presented by the platforms with specified disclosures regarding the terms of the loans and/or impose substantive restrictions on the terms on which loans are made. No discrimination is allowed against borrowers based on certain protected classes.16 The Consumer Financial Protection Bureau (CFPB), a federal agency responsible for consumer protection in the financial sector, can bring enforcement actions for unfair, deceptive or abusive acts or practices.17 Comparatively, the P2P lending industry in China has emerged and thrived in a regulatory vacuum. For a long time, it was unclear who is a responsible regulator for the market; and there were only rare and piecemeal rules governing the P2P lending activities.18 These rules spread across Criminal Law, Consumer Law, Securities Law, and judicial interpretations of the Supreme People’s Court.19 The lack of a comprehensive regulatory regime has not only contributed, to a great extent, to the unparalleled growth of the P2P lending industry in China, but it has also generated systematic market risks which could jeopardize the sustainable development of the industry.20 Finally in December 2015, several Chinese government agencies released a consultation version of draft rules to regulate the P2P lending sector. The draft law was eventually enacted in August of 2016 as The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries (Measures).21 The Measures introduce the first comprehensive legal framework into China’s P2P lending market. The Measures feature several regulatory approaches which reflect China’s policy makers’ struggle to balance the need to encourage FinTech innovation and the urge to mitigate market risks. Section 2 applies empirical data to examine the explosive growth, the driving forces, and the contingent risks of the P2P lending industry in China; Sections 3 and 4 analyse the new regulatory regime under the Measures and its features from a comparative perspective; Section 5 discusses two critical challenges which have not been fully addressed by the Measures; the final section concludes. 2. Prime position, propulsions and perils The P2P lending industry in China has gained market recognition and position at an astounding pace in recent years due to a unique cluster of driving forces. While having served as one valuable alternative finance resource to the meet the financial demands, the unregulated P2P lending industry has also generated severe market failures and governance risks, and triggered huge concerns about the sustainable development of the industry. Prime position of the P2P lending industry The P2P lending industry emerged in China in 2007 when the first P2P platform, Shanghai Paipaidai Financial Information Service Co, known as PPDai.com,22 was launched. The explosive growth of the industry surged after 2012. As shown in Figure 1, the number of P2P platforms in 2012 was 200; by the end of the next year, the figure had surged by 4 times and reached a record of 800. As of September 2016, the number of P2P platforms was about 20 times more than the number in 2012. Comparatively, there are only 9 firms that have been authorised to offer loan-based crowdfunding platforms in the UK as of July 2016.23 Figure 1 View largeDownload slide The number of P2P platforms in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) Figure 1 View largeDownload slide The number of P2P platforms in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) The increasing availability of P2P lending platforms has attracted a growing volume of registered users, both investors and borrowers. As of September 2016, P2P platforms in China have recorded more that 3.454 million investors, which is 70 times the number in 2012; and 1.469 million borrowers, which is about 30 times the number in 2012 (Figure 2). Figure 2 View largeDownload slide The number of registered users of P2P platforms in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) Figure 2 View largeDownload slide The number of registered users of P2P platforms in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) In the meantime, the growth in the level of capital involved in P2P lending is also astonishing. The amount of P2P trading skyrocketed from CNY 21.2 billion in 2012 to CNY 105.8 billion in 2013: a growth of 5 times; and CNY 1411.2 billion as of September 2016, a growth of about 70 times (Figure 3). Comparatively, P2P lending in the UK generated approximately GBP 2.4 billion of market volume in 2015;24 in the EU, the total number was approximately EUR 3.2 billion;25 in the USA, the figure is about USD 29 billion in loans originated.26 Clearly, China has developed the world’s largest P2P industry in terms of the volume of trading capital, the number of P2P platforms and registered users (Figure 4). Figure 3 View largeDownload slide Capital volume of P2P lending industry in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) Figure 3 View largeDownload slide Capital volume of P2P lending industry in China Source: www.wdzj.com/. (Data for 2016 cover January–September only) Figure 4 View largeDownload slide Capital volume of P2P lending in the UK, the US, and China Source: Cambridge Centre for Alternative Finance Figure 4 View largeDownload slide Capital volume of P2P lending in the UK, the US, and China Source: Cambridge Centre for Alternative Finance Propulsion of the growth in P2P lending The prime position of the P2P lending industry in China is a result of a combination of factors. The first factor is the market force: on one hand, the undersupply of funding for Small and Medium Enterprises (SMEs) and low-income households by the conventional banking institutions; on the other hand, the high yield rate of investment in the P2P lending industry which enticed a supply of capital from both retail and institutional investors. Funding constraints for SMEs and low-income households are globally common. This constraint is exacerbated in China due to its State-Owned Enterprises (SOEs) dominant economy structure and the repressive financial policy.27 Consequently, the SOEs become the primary recipients of loans as supplied by the state controlled banks; while about 70 per cent of SMEs and a similar proportion of low-income households do not receive sufficient funding support.28 Meanwhile, investments in China’s P2P lending market have generated a rather high level of average returns, due to the saving of transaction costs via employing new technologies. Although the investment yield varies, for a long time, the average return for P2P has remained at a rate above 15 per cent.29 This rate is twice the figure for the return generated from many alternative investment vehicles such as the central bank bills, or other online investment schemes (Figure 5). Figure 5 View largeDownload slide Comparison of investment returns of different investment schemes30Source: Yiping Huang et al., 2016 Figure 5 View largeDownload slide Comparison of investment returns of different investment schemes30Source: Yiping Huang et al., 2016 The second major stimulating factor behind the leap forward of P2P industry in China is technological advancement, especially the widespread accessibility of the Internet and the increasing availability of big data. The widespread access of the Internet and the corollary increase of information have enabled finance suppliers and consumers to reduce transaction costs by establishing a direct relationship unencumbered by several layers of intermediaries.31 China is currently home to the largest number of internet users in the world. According to internetlivestats.com, by the end of 2016, the total number of internet users in the world will be more than 3424.97 million; among them, over 721.43 million users will be based in China. In comparison, the UK has 60.27 million internet users, the USA has 286.94 million, 8.35 per cent and 39.77 percent of Chinese, respectively.32 More importantly, a clear majority of Chinese internet users are accessing the internet via a mobile platform, which grants them unprecedented easy connections to the internet and to their peers (Figure 6a and b). Figure 6 View largeDownload slide (a) China internet users 2011–2015. (b) China mobile internet users 2011–2015. Source: China Internet Watch (CIW), China Internet Statistics Whitepaper 2015. Figure 6 View largeDownload slide (a) China internet users 2011–2015. (b) China mobile internet users 2011–2015. Source: China Internet Watch (CIW), China Internet Statistics Whitepaper 2015. In addition, of the large number of internet users in China, over half are actively engaging in online business services including e-commerce, online shopping and third-party payment (Figure 7).33 Their active business engagements generate an extraordinary amount of information data to be utilized by internet companies and financial institutions. Efficient processing of this Big Data can help reduce the information asymmetry problem, which is the central challenge for financial intermediaries when conducting credit evaluation, risk pricing, and transaction matching. Figure 7 View largeDownload slide Online shopping and online payment penetration in China Source: China Internet Watch (CIW), China Internet Statistics Whitepaper 2015 Figure 7 View largeDownload slide Online shopping and online payment penetration in China Source: China Internet Watch (CIW), China Internet Statistics Whitepaper 2015 Take the Ant Financial Services Group (Ant Financial) for an example. Originating in Alipay, the world’s largest third-party payment platform, Ant Financial has access to financial information and other data from some 451 million online accounts of business and individuals.34 In addition, as an affiliate to Alibaba Group Holding Limited, Ant Financial has access to data available on other affiliated online platforms.35 Through technological analysis of such a huge data base, Ant Financial is able to process a loan application from a qualified individual or SMEs within 3 minutes!36 Therefore, the advance of technology and its penetration in China has enabled financial transactions that would otherwise be unviable in the traditional financial industry due to an asymmetric information problem.37 The third major factor facilitating the growth of the P2P lending industry in China is the government’s appeasement policy. The P2P lending service expedites financial innovation and increases efficiency in distributing funding to groups deprived of conventional bank funding. It has been received by China’s policy makers as a way to test new models of financial services to improve the supply of commercially sustainable financial support for underserviced enterprises and individuals.38 For example, in a policy document issued in 2013, the State Council, to enhance financial support for SMEs, decreed that ministries and local governments should ‘make full use of the Internet and other new technologies to innovate and enrich online financial services models’.39 For a long period, since 2007 when the first Chinese P2P lending platform was launched, P2P lending platforms in China have not been subject to market entry rules, industrial criteria or regulatory monitoring as in the UK and the USA. It was only in 2013, the State Council in the Several Opinions on Promoting Information Consumption to Expand Domestic Demand recognized the need to regulate Internet finance services when promoting Internet finance innovation.40 But the government had not made any further regulatory moves until July 2015 when the first official document relating to the overall FinTech industry, namely the Guiding Opinions on Promoting the Healthy Development of Internet Finance, was released. Until then, it was unclear which regulatory authority should be responsible for P2P lending. Accordingly, the China Banking Regulatory Commission (CBRC) acceded to its status as the main regulatory authority over the P2P lending industry in China.41 However, the Guiding Opinions per se provide only a general framework for the overall FinTech industry. Regulatory gaps for the P2P industry were yet to be filled.42 Peril of the P2P lending market Propelled by these factors, P2P lending business in China has experienced an excessive scale of growth. The surge of the P2P lending sector has generated an array of credit risks, business operation risks and information security risks, which may trigger market failure, regulatory failure and even governance failure. Fraud, fund flight and illegal fund-raising have been reported frequently; bilked investors were left out of pocket as many P2P platforms went bust.43 On one side, the collapse of several high profile P2P platforms have caused direct damage and loss to many public investors. Take the Ezubao case for an example. Ezubao was once hailed as the ‘dynamo’ of the P2P lending industry in China.44 It was set up in July 2014 but ceased to operate in December 2015 and eventually closed in February 2016. Upon its collapse, an estimated CNY 50 billion investment from more than 900,000 investors was lost. An investigation later revealed that it was essentially operated as a Ponzi scheme: more than 95 per cent of the projects advertised on its online P2P lending platform were fake.45 Eleven individuals who managed Ezubao are now facing criminal charges of fraudulent fund raising, while another 15 personnel are charged with the illegal absorption of public deposits.46 On the other side, the sharp increase and the wide spread of problematic P2P platforms has generated great concern among the public.47 The number of problematic P2P platforms has skyrocketed from 16 in 2012 to 2,076 in September 2016 (Figure 1). In other words, some 48.2 per cent of P2P platforms were problematic in 2016. Meanwhile, the proliferation of problematic P2P platforms has spread widely across China. A recent survey has observed a similar proportion of problematic platforms across the country (Figure 8).48 Figure 8 View largeDownload slide Regional distribution of proportions of problematic platforms Source: Huang et al. (2016) Figure 8 View largeDownload slide Regional distribution of proportions of problematic platforms Source: Huang et al. (2016) 3. The need for regulations Without regulatory intervention, the P2P lending industry has highlighted ‘the elephant in the room’. Finally, in December 2015, the newly selected regulatory agency—the CBRC—released a first draft of comprehensive rules for the P2P industry, and these were eventually enacted in August 2016 as the binding rules. The binding rules are to comprehensively implement a precursory regulatory attempt over the overall FinTech industry as sketched out under the 2015 Guiding Opinions on Promoting the Healthy Development of Internet Finance. First, the precursory regulatory attempt In July 2015, the Chinese government unveiled the first official document to lay down a regulatory blueprint, some basic requirements and general guidance over the FinTech industry. Titled the Guiding Opinions on Promoting the Healthy Development of Internet Finance, this regulatory document is a joint effort of the People’s Bank of China, and a further nine agents of the central government to oversee a wide range of FinTech innovations.49 The essential purposes of the Guiding Opinions are two-fold: (1) to encourage innovation in Internet finance platforms, products and services to stimulate market vitality; (2) to maintain market order and sustainable development of the Internet Finance industry.50 The Guiding Opinions impose a fragmented regulatory structure over the FinTech industry. Four main government agencies are assigned to regulate different sectors of the Internet Finance industry (Table 1).51 The Guiding Opinions also reinforce the jurisdiction of the Ministry of Industry and Information Technology, and the State Internet Information Office over the provision of financial information services and Internet content services.52 Moreover, the Guiding Opinions instruct the People’s Bank of China to establish the Chinese FinTech Association (CFA) as the autonomous regulator to promote self-regulation of the FinTech market in China.53 Table 1 Main regulators of China’s Fintech innovation Designated regulators  Specified sectors  Main principles  People’s Bank of China  Online payment services  Effective risk isolation and client rights protection mechanisms must be established.  China Securities Regulatory Commission  Equity crowd-funding and online sale of funds  The entities requesting investment shall be SMEs;  All investments made should be small scale in size.  China Insurance Regulatory Commission  Internet insurance services  Risk management and internal control systems must be in place;  Necessary Chinese walls must be established between the insurance and non-insurance business.  China Banking Regulatory Commission  Online lending (including P2P lending and online microfinance), online trust services  P2P online lending platforms shall only play the role of information intermediaries;  Online microfinance shall comply with the existing regulatory provisions issued by CBRC.  Designated regulators  Specified sectors  Main principles  People’s Bank of China  Online payment services  Effective risk isolation and client rights protection mechanisms must be established.  China Securities Regulatory Commission  Equity crowd-funding and online sale of funds  The entities requesting investment shall be SMEs;  All investments made should be small scale in size.  China Insurance Regulatory Commission  Internet insurance services  Risk management and internal control systems must be in place;  Necessary Chinese walls must be established between the insurance and non-insurance business.  China Banking Regulatory Commission  Online lending (including P2P lending and online microfinance), online trust services  P2P online lending platforms shall only play the role of information intermediaries;  Online microfinance shall comply with the existing regulatory provisions issued by CBRC.  As a first precursory regulatory attempt, the Guiding Opinions set out basic rules and general guidance to regulate the FinTech-related undertakings. As far as the P2P lending sector is concerned, the Guiding Opinions draw a clear line between the P2P lending platforms and the conventional banking institutions. The nature of P2P lending platforms is defined as the information intermediary between borrowers and lenders. The roles of P2P lending platforms are restricted to provide information services to facilitate direct lending via the Internet, excluding credit enhancement services or illegal fund raising activities.54 The Guiding Opinions have not provided comprehensive rules concerning the P2P lending sector. The P2P lending business was instructed to be governed by the existing legal framework and relevant regulations on private loans.55 As such, many aspects of the P2P lending business are still in a grey area and require further clarification. For example, it is unclear what are the legal effects of some undertakings by P2P lending platforms, such as transferring factoring rights, or providing guarantees through guarantee companies, and the legitimacy of derivative financial products such as financial lease products as offered on many P2P platforms. These regulatory uncertainties are to be resolved with the enactment of the 2016 Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries. Finally, the comprehensive regulatory regime The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries (Measures) was enacted on 17 August 2016 by the CBRC, conjoint with the Ministry of Industry and Information Technology, the Ministry of Public Security and the Internet Information Technology Office. The Measures consist of eight chapters with a total of 47 articles. The Measures purport to regulate the P2P lending industry from several perspectives. The first is to refine the nature of the essential market participants, namely, lending platforms, borrowers and lenders of the platforms; the second is to clarify the responsibilities of relevant regulatory authorities; the third regulates the business conduct of the market participants. The first aspect is examined in the following section; the other two aspects are analysed in the next part. As the title reveals, the Measures are applicable to the establishment and operation of the Information Intermediary for Online Lending (IIOL) within China.56 An IIOL is hereby clarified as a ‘Financial Information Broker’, who employs an online portal as the main channel to provide financing information intermediary services to borrowers and lenders in the direct private loan business.57 The contents of intermediary services range from collecting and distributing information; to assessing and evaluating credit; through originating and matching loans.58 To make sure an IIOL serves only as the information broker, the Measures bar an IIOL from engaging in the currency credit business and other financial services business, such as increasing credit rating, gathering funds directly or indirectly, raising funds illegally or other business that might jeopardize national or public interests.59 Essentially, an IIOL is constrained to operate online portals where private loan contracts are signed directly between a lender and a borrower. An IIOL can only disseminate information but not assume any credit risk incurred by the online lending business.60 Comparatively, the Measures’ approach to refine an IIOL as an information intermediary contrasts with the nature of many P2P platforms operating in the USA. The SEC’s registration requirement has forced many P2P platforms in the USA to issue loans to borrowers in the platforms’ own names. Instead of assigning the borrower’s obligation to the lender, the US platform issues ‘borrower-dependent payment notes’ to lenders. Thereby, many US platforms assume ‘the role of “creditor” in each transaction’; or in other words, the US platform has essentially ‘stepped in to act as a clearinghouse’.61 The Measures also regulate the other two major market players, namely, lenders and borrowers. The Measures stipulate prudential entry requirements for individuals entering the online lending market. First, the Measures mandate a real name registration system for individuals engaging in the online lending business.62 Whether natural persons or enterprises, they are required to register on the internet platform with true, accurate and complete information about their identities. Secondly, the Measures prescribe the conditions for lenders and borrowers while undertaking online lending transactions. Lenders should be familiar with the use of the Internet and have an awareness of investment risks, a capability for risk identification, and experience of non-guaranteed financial products investment.63 They should only tender funds which are obtained from legitimate sources.64 Thirdly, the Measures mandate that while seeking loans, borrowers must ensure the fidelity and legality of their financing projects, must deploy the secured funds only for the purpose as proposed and must disclose in time material information that could affect the lender’s interests. In addition, borrowers must not seek duplicate financing for the same project via a plurality of P2P lending platforms.65 The Measures officially legalize online loans tendered by or for enterprises which are referred to as legal persons or other entities. Enterprises, especially the Small and Medium Enterprises (SMEs), have been subject to the undersupply of conventional financial services due to repressive financial policy. They have previously turned to funding sources such as shadow banking for alternative sources of financing.66 The P2P lending industry provides SMEs with a legitimate and increasingly crucial source of alternative funding. SMEs in China have now evolved to be the main beneficiary of the P2P lending industry. Between 2013 and 2015, P2P lending platforms have facilitated USD 129.53 billion worth of loans; among them, SMEs have received USD 49.11 billion worth of capital, with an average growth rate of 425 per cent.67 To make sure the P2P lending is a micro-financing alternative for SMEs or individual consumers in need, the Measures stipulate a cap system to control the size of loans taken out via P2P platforms.68 The loan cap for a natural person is CNY 200,000 from one single P2P platform, or CNY 1 million from multiple of P2P platforms; while the loan cap for an enterprise is CNY 1 million or CNY 5 million, respectively.69 Through this capping mechanism, the Measures purport to provide better protection for investors from potential risks involved in the P2P lending activities since the size of lending is under control and maintained at a certain level. 4. Featuring regulatory approaches The P2P lending industry in China, despite its drastic growth, is still in its first decade of development. Nevertheless, the wide spread of high profile lending platform failures has devastating effects on the protection of investor’s interest. Hence the purpose of the recently enacted measures is to prevent irrational investment, to protect the interests of investors and to ensure sustainable growth in the industry.70 To achieve this purpose, the Measures refine entry conditions for players in the P2P lending market. More importantly, the Measures adopt several regulatory approaches to mitigate potential risks without jeopardizing industry innovation. These regulatory approaches include a multifurcate regulatory structure, negative list management, information disclosure requirements and third-party-based monitoring. The multifurcate regulatory structure to devolve regulatory powers The Measures adopt a multifurcate regulatory structure to devolve regulatory powers to simplify the administrative process governing the P2P lending market. First, the CBRC is responsible for the development and implementation of national rules governing P2P lending.71 The CBRC and its local agencies are also mandated to guide and assist local governments with the regulation of P2P lending business in their respective regions, to coordinate and establish the cross-sectoral and trans-regional mechanism for industrial supervision.72 Meanwhile, the Measures decentralize the regulatory structure by giving local governments the vast majority of oversight work to oversee the operation of the IIOLs registered within respective regions. Accordingly, local governments are responsible for the registration of and filings by the IIOLs, for the surveying and collection of industrial data and for reporting any substantial market risk—if it emerges—to the CBRC.73 This regulatory devolution provides local governments the discretion to implement regulation to meet regional conditions. However, this arrangement might risk parochial or inadequate legal enforcement. On one hand, P2P lending transactions are operating via the Internet, local variances of P2P lending markets are not as substantial when compared to other conventional commercial activities which are embedded into local conditions. As some data have indicated, no region-specific patterns have been observed when it comes to the problematic P2P lending platforms74 (Figure 1). On the other hand, the internet-based P2P platforms operate complex interconnected businesses across cities, provinces and even countries. They tend to attract large-scale investors scattered across many regions.75 A good example is the Ezubao fraud. During its 18-months in operation, the Ezubao had run some 1,000 sales agencies nationwide engaging in savvy marketing. When it ceased operation in December 2015, the total loss of estimated £5.3bn had involved about 900,000 people across the country.76 The resolution of such a dispute could easily go beyond the capacity and resources of local governments. Therefore, it would be critical to strengthen the role of the CBRC as the national regulator not only in terms of the formulation and implementation of regulatory policies, but also in the coordination of regulatory enforcements. The Measures also subject the P2P lending market to the jurisdiction of a handful of other governmental agencies. First, as it operates via the online portal, P2P lending business is subject to the regulation of the Ministry of Industry and Information Technology (MIIT) which supervises the telecommunications business including approving and issuing telecommunications business permits (ICP licence).77 Secondly, the Ministry of Public Security (MPS) monitors the internet service safety, investigates activities suspected of violating internet security and other financial crime involved in P2P lending. Last but not the least, the National Internet Information Office (NIIO) scrutinizes the financial information, online content and other services involved in P2P lending.78 Apart from these government agencies, The Measures also endorse the roles of the industrial autonomous regulator. The Chinese FinTech Association (CFA) is acknowledged as the main self-regulatory body and charged with a wide range of duties including: (i) to develop and implement self-regulatory codes, business rules and industry standards; (ii) to educate members and to promote their compliance with relevant law and regulations; (iii) to mediate and resolve—if acceptable—disputes among members; (iv) to receive and inspect complaints and reports by the members and investors; and (v) to set up a designated P2P Lending Speciality Committee.79 It is worth noting that China’s watchdog on the securities market, the CSRC, has been absent from the regulatory map of the P2P lending sector. The CSRC’s regulatory absence contrasts with its counterpart in the USA, where the SEC has asserted itself as the chief regulator over the P2P lending market.80 The key reason is the restricted legislative approach as adopted by the current Chinese Securities Act. The Securities Act has prescribed a strict list of statutory types of securities, but a P2P loan cannot be classified as any one of them.81 While P2P loans in the USA are treated as securities and therefore come under the oversight of the SEC. Thereby in China P2P lending sector is not covered by the CSRC regulatory powers, since P2P lending transactions do not involve the issuance, or transference of statutorily classified securities. The negative list-based approach to curtail administrative costs The Measures, designed to enhance the sustainable development of the P2P lending industry, adopt a much anticipated regulatory approach, namely, the so-called ‘Negative List Approach’ (NLP).82 The NLP was initially introduced to manage foreign investment within the Shanghai Pilot Free Trade Zone.83 It refers to ‘a list of industrial sectors which the host country bans or where it limits foreign investment’.84 Industrial sectors not included in the ‘negative list’ are open to foreign investors and exempted from the governmental approval mandate. The only requirement for foreign investment into unrestricted sectors is the registration and filing of up-to-date information.85 Accordingly, the NLP regulatory approach under the Measures has two interconnecting elements: (1) an explicit list of restricted activities to manage the business scope of IIOLs; (2) a mandatory registration and filing system for P2P lending undertakings. The prohibited activities to reduce the market risks Defined as the information intermediary instead of the credit intermediary, an IIOL can act only as an online information intermediary between lenders and borrowers. Accordingly, the Measures adopt a negative list to prohibit an IIOL to undertake business activities that could jeopardize its nature as an information intermediary. The negative list is incorporated into 12 clauses, which can be grouped into three major categories as shown in Table 2. Table 2 The prohibited activities under the negative list Major categories  The prohibited undertakings  Directly engaging in a lending transaction  Article 10(1), financing their own projects or related parties’ projects with funds solicited via their platforms  Article 10(2), directly or indirectly holding and gathering lenders’ funds  Article 10(5), offering loans, unless permitted by other laws and regulations  Facilitating/Promoting lending transactions  Article 10(3), offering guarantees to lenders or promising fixed returns  Article 10(4), directly or indirectly undertaking offline companioning for financing projects86  Article 10(6), dividing the time framework of financing projects  Article 10(10), misleading the borrowers and the lenders with inaccurate or false information  Engaging in high-risk financial business  Article 10(7), selling or consigning asset management products, securities, funds, insurance products, trust products or other banking financial products  Article 10(8), undertaking assets securitization business, or debt transference activities.87  Article 10(9), compounding, bundling or brokering investment, consignment, brokerage or other services with another institution, unless permitted by laws and regulations  Article 10(11), offering information intermediary service for high-risk capital financing projects investing in stocks, OTC, futures, structured products and other derivatives  Article 10(12), undertaking equity crowdfunding service88  Major categories  The prohibited undertakings  Directly engaging in a lending transaction  Article 10(1), financing their own projects or related parties’ projects with funds solicited via their platforms  Article 10(2), directly or indirectly holding and gathering lenders’ funds  Article 10(5), offering loans, unless permitted by other laws and regulations  Facilitating/Promoting lending transactions  Article 10(3), offering guarantees to lenders or promising fixed returns  Article 10(4), directly or indirectly undertaking offline companioning for financing projects86  Article 10(6), dividing the time framework of financing projects  Article 10(10), misleading the borrowers and the lenders with inaccurate or false information  Engaging in high-risk financial business  Article 10(7), selling or consigning asset management products, securities, funds, insurance products, trust products or other banking financial products  Article 10(8), undertaking assets securitization business, or debt transference activities.87  Article 10(9), compounding, bundling or brokering investment, consignment, brokerage or other services with another institution, unless permitted by laws and regulations  Article 10(11), offering information intermediary service for high-risk capital financing projects investing in stocks, OTC, futures, structured products and other derivatives  Article 10(12), undertaking equity crowdfunding service88  In comparison to the previous draft version, the enacted Measures have incorporated a few notable changes to the negative list. Some of the changes clarify the draft provisions. To give one example, Article 10(4) in the draft version banned ‘the sale campaign targeting at non-real-name register of the platform’, but failed to mention the offline campaigning activities. The updated Article 10(4) in the enacted version clarifies the nature of IIOLs as an online intermediary, which is proscribed from offline business unless permitted otherwise.89 Some other changes in the enacted version expand the scope of prohibited activities. One example is Article 10(10). In the draft version, only ‘the investment in the stocks’ is listed as the high-risk investment that is barred from the intermediary service of an IIOL. In the enacted version, the scope of high-risk instatement has been expanded to include the OTC, futures, structured products and other derivatives. These prohibited undertakings reflect China’s policy makers’ intention to refine the business nature of an IIOL as the online information intermediary for alternative micro financing. They also reflect the policy makers’ preference to distinguish the IIOL from other financial intermediaries such as commercial banks, investment funds or equity based crowdfunding platforms. As P2P lending is still at an early phase of development, the list of prohibited activities is probably one of the most advisable approaches to striking a balance between encouraging the innovation of accessible alternative finance and avoiding excessive exposure to industrial risks. The registration and filing system to reduce administrative costs The Measures have adopted a registration and filing system for the IIOLs and their subsidiaries to balance the need to scrutinize market entrants, the need to induce sufficient competition and innovation, and the need to reduce operational compliance costs.90 The Measures mandate that local governments must accept the submitted documents if the procedural requirements are met, and complete the registration process within a time frame as set by local authorities.91 The local governments do not have the power to reject a registration request based on a substantive document review. Hence the successful registration of an IIOL does not constitute an endorsement by the government of the management, compliance and credibility of the registered IIOL.92 The local governments, however, are empowered to assess, rate and classify registered IIOLs into different categories pursuant to a specified guidance on assessment and classification.93 They must publish the information online, including the registration documents, the assessment results and the classifications of IIOLs.94 The approach of the registration and filling system in China is in dramatic contrast to the licensing and authorization system as adopted in other jurisdictions. For example, in the UK, it is mandated that: (1) firms running loan-based crowdfunding platforms from 1 April 2014; or (2) firms that do not hold a consumer credit licence from the Office of Fair Trading (OFT) on 31 March 2014 but intending to engage in the loan-based crowdfunding businesses, must first secure full authorization from the FCA before they may operate in the market.95 When applying for FCA authorization, a firm in the UK must meet several prudential conditions. First, it must submit a suitable and detailed business plan setting out the planned activities and related risks, budget and resources (human, systems and capital); secondly, it must have adequate non-financial resources, ie the management board must have adequate knowledge and experience of financial regulation; thirdly, it must have adequate financial resources, ie must hold minimum amounts of capital to ensure continuity of operations in the case of future financial shocks;96 fourthly, it must have an operational, or close to operational, website to demonstrate how it will operate should the authorization be granted.97 In addition, a firm must have resolution plans in place such that, in the event of the platform failure, loan repayments will continue to be collected and the loan will be managed until maturity.98 The FCA’s prudential requirements for authorization have extensive effects on the growth of P2P lending platforms in the UK. The direct result is the growing backlog of applications: it was estimated that an applicant had to wait for an average of six months for FCA authorization.99 Consequently, as of July 2016, two years after the introduction of the authorization regime, only 9 firms have been fully authorized to operate loan-based crowdfunding platforms; while 88 applications are still waiting for approval.100 The information disclosure-based approach to enhance investor protection The information disclosure-based approach is one of the regulatory responses to resolve inefficiency and ineffectiveness of conventional command and control regulation.101 Originating from the US federal securities laws, the disclosure-based regulation is one key mechanism to achieve the fair-dealing and anti-fraud regulatory purpose.102 This regulatory approach has already been adopted to regulate P2P lending in other jurisdictions to ensure that investors have access to clear information and to promote effective market competition. For example, the FCA, viewing the investors of the P2P lending business as ‘lacking the knowledge, experience and resources to cope with possible significant losses’,103 has adopted a comprehensive set of information disclosure rules. A P2P lending platform in the UK is required to submit reports to the FCA on a regular basis. The report should include information about financial statements, customer funds status, expected and actual default rates, investment security mechanisms, loan arrangements, complaints and litigation policy and so on.104 China’s new regulatory regime on P2P lending also adhere to the information disclosure-oriented approach to ensure adequate information is available to prospective investors. IIOLs are vested with the duty of obtaining information about lenders, borrowers, risk assessment and rating the results of each financing project.105 They are obliged to take measures to ensure the completeness, accuracy and safety of the disclosed information.106 This information, together with further information about existing financing projects brokered by the IIOLs, must be made available to the public on its online portals.107 To make sure that IIOLs meet the information disclosure duty, the Measures turn to other gatekeepers for their critical disciplinary roles in creating a transparent, open and fair P2P lending business environment. Accordingly, an IIOL must appoint third parties, including an auditing firm, a qualified cyber security firm and a law firm, to assess the information disclosure adequacy, to test and certify the information safety of the online platform, to verify the compliance level of the business operation.108 IIOLs are required to circulate regulators with third-party reports and assessment results, and make them accessible to the public.109 The third-party gatekeeper-based approach to mitigate industrial risks The P2P lending industry in China has produced various mutations in its business models.110 Many P2P lending platforms have, to varying degrees, been evolving to quasi- financial institutions engaged in credit intermediary services, including directly providing securities guarantees to investors, inappropriately gathering client funds, or intentionally appropriating pooled capital for other use.111 They have thus veered from the primary roles in brokering online lenders and online borrowers. To mitigate financial risks, on one hand, the Measures prohibit P2P lending platforms from excessive undertakings;112 on the other hand, the Measures strengthen the roles of third-party gatekeepers113 to interdict misconduct of the P2P lending platforms. The previous section has discussed the roles of auditing firms, cyber security firms and law firms in verifying compliance with information disclosure/securities standards or procedures. The following section will interrogate how the Measures mandate another two gatekeepers in their roles of assuring the reliability and sustainability of investment in the P2P lending market. Third-party guarantee arrangement In order to attract investment, the P2P industry has resorted to guarantees as a collateral mechanism to ensure the delivery of yield and repayment of a loan. Previously, as common practice, the guarantees are tendered either by a third party such as a financing assurance company, or by a P2P lending platform itself. By acting as a guarantor, a P2P lending platform directly engages itself into the private lending agreement as a contractual party. This undertaking essentially transfers a P2P lending platform from an information intermediary to a credit intermediary, and exposes a P2P lending platform to collateral liability and credit risks in case of loan defaults.114 Having refined a P2P lending platform as an information intermediary, the Measures consistently bar a P2P lending platform, and its related firms, from providing the guarantee to borrowers as the collateral arrangement for brokered loans.115 The Measures now permit only a guarantee by a third-party enterprise, by which P2P lending platforms are severed from collateral arrangements and potential credit risks of lending defaults. It represents the policy to balance the need to protect investors’ interests and platforms’ neutrality.116 However, overreliance on the collateral arrangements provided by third-party enterprises also bears intrinsic risks. From a behavioural economics point of view, public investors, guaranteed repayments by collateral arrangements, have less motivation to screen borrowers and their financing projects. Meanwhile, a guarantee company tends to provide services to a large number of investors dispersed throughout the nation. Without regulation, the credit risks might be disproportionally accumulated and concentrated on the third-party guarantee companies, causing the potential risk of a nation-wide systemic crisis.117 The regulation for the third party guarantee companies, however, is left out from the Measures.118 The current national rules regulating guarantee companies are to be found under the Interim Measures for the Administration of Financing Guarantee Companies (Interim Measures), which was enacted in 2010 by a consortium of Ministries.119 The current Interim Measures, however, do not apply to the P2P lending industry but only to the banking industry.120 Set to replace the Interim Measures, a draft version of the Administrative Measures for the Financing Guarantee Companies was distributed by the State Council for comments and consultations in August 2015.121 The draft version has extended the previously narrow regulatory scope to third party guarantee companies for P2P lending business.122 We will have to wait for the promulgation of the final confirmation. The third-party depositor and custodian scheme As one of the key restrictions under the negative list, an IIOL is now barred from directly or indirectly holding and gathering client money as solicited via the online portals.123 The purpose of this restriction is to segregate the client fund from an IIOL, to prevent an IIOL from the establishment of a capital pool, and to eschew the fraud, embezzlement or misappropriation of the client capital. To achieve this policy purpose, the Measures introduce the so-called third-party depository and custodian scheme.124 Many third-party payment companies working closely with P2P lending platforms have been hoping to win the right to serve as custodians for the funds that investors deposit on the platforms.125 However, it is qualified banks which are granted the privilege by the Measures as the third-party depository financial institutions.126 It is mandated that depository contracts must be signed among lenders, borrowers, IIOLs, the entrusted banking institutions and guarantees. It must be clarified, in the Depository Contracts, that the entrusted banking institutions are the agencies responsible for holding, managing, and transferring the P2P funds between lenders and borrowers.127 P2P platforms in the UK are also obliged to conform to the so-called Client Money Rules to separate all client money from the firm’s own funds.128 The Client Money Rules, inter alia, bar the co-mingling of client monies, demand clear and transparent holding of client monies. The CASS 7.13, for example, prescribes specifically how Client Money ought to be separated, as well as guidelines on how to submit client money and asset return statements. Comparatively, the Measures have only mandated, as a general principle, the third-party depository scheme for the management of client fund. To implement this general principle, the CBRC in August 2016, shortly after the enactment of the Measures, circulated the draft Guidance for the Depository Scheme for the P2P Lending Business (Draft Guidance) for consultations and comments.129 Among other areas, the Draft Guidance clarifies that a qualified third-party banking institution must have established a well-functioning operating system to provide designated accounts for entrusting IIOLs, lenders, borrowers and other relevant parties. All designated accounts must be clearly segregated from each other.130 In addition, the entrusted third-party banking institution must serve as the last and sole custodian. They must not outsource the depository service or cooperate with another party to provide the service.131 The strict and clear segregation of clients’ funds from IIOLs’ is necessary and timely, if not too late. As revealed in many high-profile cases in China, the unrestricted access to investors’ fund by an online platform or its related companies has induced the collapse of many IIOLs, and the failure of investors' protection.132 Clearly, the draft Guidance has implemented stringent rules to ensure that accounts holding client funds are segregated form a platform’s own accounts; these accounts must be managed independently by qualified third-party banking institutions. We will have to wait for the enactment of the Guidance to review the formal third-party depository scheme in full. 5. Unresolved regulatory challenges As the first comprehensive regulatory initiative, the Measures have prescribed rather sophisticated rules to ensure a controlled innovation of the P2P lending industry. The Measures, however, have also left some regulatory cloud. Several critical issues are to be clarified with implementing guidance. As discussed in the previous sections, several pieces of implementing guidance on matters such as the information disclosure and the third-party depository scheme, are to become effective soon. A few other vital matters have not been dealt with by the Measures. The regulatory gap might jeopardize the sustainable development of the P2P lending market. This section addresses two vital unresolved challenges: the first is the regulatory inconsistency with the existing rules for cracking down on illegal fund-raising activities; the second is the regulatory absence governing conflicts of interest and the resolution of disputes. Inconsistency of rules governing illegal fund-raising activities The current regulatory framework in China is rather repressive towards public financing business. A public financing business must be conducted strictly in accordance with relevant law and regulations, or it would be classified as an illegal fund-raising activity and subject to severe sanctions by the criminal law.133 The current Criminal Act prescribes several crimes involving illegal fund-raising activities.134 Violators are subject to draconian criminal sanctions ranging from fines to a life sentence in prison. In fact, it was only until the 2015 XI Amendments to the Criminal Law that the death penalty was removed as the maximum penalty for the crime of fraudulent fund raising.135 It is worth noting that the operation and promotion of public financing business is commonly regulated in many other advanced markets such as the UK. The Financial Services and Markets Act 2000 (FSMA) mandates the pre-approval requirement for establishing and operating the so-called collective investment scheme (CIS).136 As a general prohibition, no person shall promote a CIS to the general public without authorization or exemption.137 In one recent case involving a land banking scheme which led to 110 investors losing over £4.3 million, five individuals were found to be in breach of the above general prohibition for their roles in unauthorized collective investment schemes. As a consequence, they were sentenced to a total of 26 years’ immediate imprisonment.138 The nature of P2P lending is public financing: a borrower publicly solicits funds from a crowd of unspecific lenders; while a lender normally diversifies his/her capital to a group of borrowers. P2P lending hence provides fertile ground for illegal fund-raising activities. In fact, the People’s Bank of China in 2013 has warned of epidemic illegal fund-raising activities involved in the P2P lending business.139 Statistically, the crime of illegal absorption of public deposits and the crime of fraudulent fund raising have been found to be the two most commonly indicted illegal fund-raising activities in P2P lending market. According to a recent survey, 12 criminal cases involving P2P platforms have been trialled and concluded. Among them, 6 cases were charged with the crime of illegal absorption of public deposits, another 5 cases with the crime of fraudulent fund raising.140 The provisions under the Measures have not been consistent with the existing draconian rules on illegal fund-raising activities. Take the crime of illegal absorption of public deposits, for example. Illegal absorption of public deposits refers to undertakings of ‘illegally taking deposits from public or such an equivalent activity’.141 These undertakings are subject to criminal sanctions if any of following criteria are reached: (i) the amount of deposits involved exceeding CNY 200,000 (when the undertaker is an individual) or CNY 1,000,000 (when the undertaker is a firm); (ii) the number of depositors involved exceeding 30 (individual), or 150 (firm); or (iii) the direct economic loss exceeding CNY 200,000 (firm), or CNY 500,000 (firm).142 The Measures adopt the loan cap mechanism for P2P lending, which is consistent with the aforementioned first criteria.143 Nevertheless, the Measures have no provisions concerning the other two scenarios. The lack of clarification could subject the users of P2P lending platforms to the constant threat of criminal sanctions for the ‘illegal absorption of public deposits’. In addition, an individual or an entity which has aided illegal fund-raising from the public and charged fees, including but not limited to agent fees, rewards, rebates and commission, could be prosecuted as an accomplice to the crime of illegal fund-raising.144 Hence, P2P platforms are also under the threat of the ‘Damocles Sword’—the harsh criminal sanctions for illegal fund-raising activities. The Measures’ lack of clarification as to both caps on the number of lenders or the amount of loss can be explained by the fact that the policy makers have concluded the inadvisability of introducing both caps to P2P lending practices. To restrict the number of lenders would compromise the essential feature of P2P lending as public financing. It would also discourage the diversification of investment which could increase the potential loan failure costs borne by each investor.145 To resolve this regulatory inconsistency would require legislative coordination. The current primary rules governing the illegal fund-raising activities are set out by the Supreme People’s Court back in 2010. These rules are clearly too stringent and rather obsolete. The Supreme People’s Court should adapt its judicial interpretations to avoid imposing unnecessary regulatory obstacles on the bourgeoning P2P lending innovation. Absence of rules governing dispute resolution and conflicts of interest Disputes among lenders, borrowers and/or online portals are altogether pervasive in the P2P lending industry in China. As the retrieved data demonstrates, nearly half of the operating P2P platforms in China have recorded at least one of the following disputes: termination of operation, failure to cash out, cheating, loss of contact, police interference or platform shutdown.146 The Measures have not addressed these pervasive issues in full. The Measures only clarify who are the authorities to receive a complaint arising out of the P2P lending disputes.147 No rules are provided regarding how to report, to handle complaints or to resolve disputes. Neither is there an indication under the Measures that further supplementary guidance will be made to address this matter. In comparison, the FCA has prescribed detailed rules under the Dispute Resolution: Complaints on how to handle, report and communicate complaints against the platform and/or its staff members.148 For example, the P2P lending platforms are required to, among other duties, clearly communicate their complaints procedure on their sites and direct complainants to the Financial Services Ombudsman in the event of dissatisfaction. In addition, the FCA in its Conduct of Business Sourcebook has prescribed specific recovery procedures in case of a default of a P2P lending agreement.149 In the future revision, the Measures should adopt a similar regime. A firm operating P2P business should be mandated to publish on its online portal comprehensive policy documents, for both users and staff, to set out how complaints should be processed. Firms should also be required to have Wind-down plans or other resolution plans in place so that, if a P2P platform collapses, loan repayments will continue to be administered and investors should not lose their investment. Another vital matter which the Measures have not addressed is how to regulate scenarios of conflicting interests among relevant parties. The Measures only stipulate that the directors, supervisors, and other senior managers should act with due diligence when disclosing information.150 Comparatively, the FCA mandates a firm engaging P2P lending business to take ‘all reasonable steps’ to identify conflicts of interests: (1) between the firm, including its managers, employees and appointed representatives (or where applicable, tied agents), or any person directly or indirectly linked to them by control, and a client of the firm; (2) between one client of the firm and another client.151 The FCA goes further and sets a regulation on suggesting the contents of a conflicts of interest policy (SYSC 10.1.10). P2P lending platforms are required to draft a Conflicts of Interest Policy and Process document which identifies: ‘potential conflicts, the actions it will take and a means by which staff may highlight potential conflicts of interest to senior manages.’152 In a future revision, the Measures should also mandate clearly that a P2P operator must establish a policy framework to set out procedures to effectively and efficiently identify and address potential conflicts of interest. The policies and procedures should be published on the online portals to enable external investors and market regulators to assess and to mitigate these conflicts once they emerge. 6. Conclusion Capital is said by a Quarterly Reviewer to fly turbulence and strife, and to be timid, which is very true … With adequate profit, capital is very bold. A certain 10 per cent will ensure its employment anywhere; 20 per cent certain will produce eagerness; 50 per cent, positive audacity; 100 per cent will make it ready to trample on all human laws; 300 per cent., and there is not a crime at which it will scruple, nor a risk it will not run, even to the chance of its owner being hanged …153 As proclaimed by Thomas Dunning and endorsed by Karl Marx, a high rate of profits would entice excessive capital mobility and likely induce extravagant risks. The explosive growth of the P2P lending sector in China sets a good example. The high yield rate of more than 10 per cent of capital investment in the P2P lending industry, alongside the regulatory arbitrage and other market forces, has fostered the unparalleled growth of the P2P lending market in China. The unparalleled growth has rendered a favourable alternative financing option to the under-supplied financial market consumers: the SMEs and individual households. It has also encouraged innovative entrepreneurship and imposed competitive pressure on the traditional financial industries to revamp their conventional financial products and services. Nevertheless, this explosive growth has triggered growing concerns over systematic financial risks, increasing market failures and potential social unrest. The widespread problematic P2P lending platforms and high profile collapsed platforms have transformed the P2P lending industry in China to ‘the elephant in the room’ for Chinese policy makers. Proactive approaches are urgently needed to mitigate extravagant risks incurred in the P2P lending market while not to jeopardize the financial technology innovation of this young industry. It is against this backdrop that the Measures, incorporating several innovative regulatory approaches that are enacted with the purpose of providing an optimal regulatory regime for the sustainable growth of the P2P lending market in China. The newly established regime is a welcome regulatory development. It not only provides comprehensive legal protection for participants in the P2P lending market in China; but also contributes a new model to the global regulatory map for the sustainable growth of the P2P industry. The new regulatory regime represents a pivotal change leading to a regulatory paradigm shift from light regulation to tight regulation. The rules of the game for the P2P lending industry in China have changed. Many of the existing P2P lending platforms will have difficulty meeting the compliance requirements as set out by the new regulatory regime. For example, a recent survey indicates that only 27 per cent of the P2P lending platforms meet the requirement to cap loans at CNY 200,000 for each individual borrower.154 To take another example, as of 19 October 2016, two months after the enactment of the Measures, there had been only 71 platforms which have established a third-party depository scheme with custodian banking institutions, to comply with the fund segregation requirements.155 This fraction of platforms merely account for approximately 1.74 per cent of the existing P2P lending platforms (4072 platforms were recorded as of September 2016, see Figure 1). To avoid harsh impacts on the P2P lending industry, the Measures allow a 12-month grace transitional arrangements for the market. During the transition period, firms engaging in P2P lending activities must adapt their business operations to the new regime. It is likely that many existing platforms will either be shut down, or bought out by stronger competitors. The raised compliance costs will also deter new players from entering the market. Consolidation of the industry will be inevitable. However, the far-reaching effects of the new regulatory regime can only be assessed in full after the transitioning period. Footnotes 1 Douglas W Arner et al. The Evolution of Fintech: A New Post-Crisis Paradigm?, University of Hong Kong Faculty of Law Research Paper No. 2015/047; UNSW Law Research Paper No. 2016-62. Available at SSRN: <https://ssrn.com/abstract=2676553> accessed 1 October 2016. Douglas W Arner et al., ‘FinTech, RegTech and the Reconceptualization of Financial Regulation’, Northwestern Journal of International Law & Business, Forthcoming; University of Hong Kong Faculty of Law Research Paper No. 2016/035. Available at SSRN: <https://ssrn.com/abstract=2847806> accessed 1 October 2016. See also, Iris H-Y Chiu, The Disruptive Implications of Fintech-Policy Themes for Financial Regulators, available at SSRN: <https://ssrn.com/abstract=2812667 or http://dx.doi.org/10.2139/ssrn.2812667> accessed 21 July 2016. 2 Art 3, the 2015 Guiding Opinions on Promoting the Healthy Development of Internet Finance, China Banking Regulatory Commission, et al. An elaborated discussion of the Guiding Opinions appears below in the section ‘First, the Precursory Regulatory Attempt’. 3 The transaction volume in China recorded about CNY 638.79 billion (or USD 101.7 billion) in 2015. The figure in the USA is USD 36.49 billion; in the UK, it is GBP 3.2 billion. For a survey of the FinTech development in the Asia Pacific region, see: Harnessing Potential: The Asia Pacific Alternative Financing Benchmarking Report (Cambridge Centre for Alternative Finance 2016). For the American market: Breaking New Ground: The Americas Alternative Finance Benchmarking Report (Cambridge Centre for Alternative Finance, April 2016). For the UK market: Pushing Boundaries: The 2015 UK Alternative Finance Industry Report (Cambridge Centre for Alternative Finance, February 2016). 4 About USD 97.58 billion out of the USD 101.7 billion alternative finance market volume is registered with the P2P lending sector in 2015. Harnessing Potential (n 3). Other sectors such as online payments and sales of investment products are also leading the FinTech innovation in China. Office, The UK Foreign & Commonwealth, Financial Services Special Report: China’s Fintech Market (July 2016) 1. 5 The reason to adopt Online Marketplace Lending, according to the US Department of Treasury, is that the products and business models of online lending have now evolved, the investor base has expanded from individuals to institutional investors, hedge fund and financial institutions. Hence it is ‘no longer accurately described as a “peer-to-peer” market’. White Paper on Online Marketplace Lending: Opportunities and Challenges in Online Marketplace Lending (May 2016) 5. 6 FCA, The, A Review of the Regulatory Regime for Crowdfunding and the Promotion of Non-Readily Realisable Securities by Other Media (February 2015) note 2. 7 For a general review, The Business Models and Economics of Peer-to-Peer Lending (European Credit Research Institute, No 17/ May 2016). Also Alexander Bachmann et al., ‘Online Peer-to-Peer Lending—A Literature Review’ (2011) 16 J Internet Banking Commerce 1. 8 White Paper on Online Marketplace Lending: Opportunities and Challenges in Online Marketplace Lending (May 2016). Commission Staff Working Document on Crowdfunding in the EU Capital Markets Union (May 2016). Pushing Boundaries (n 3). The Business Models (n 7). See also below in the section ‘Prime position of the P2P Lending Industry’ for a discussion of the growth of P2P lending industry, in China and in other jurisdictions. 9 Jack R Magee, ‘Peer-to-Peer Lending in the United States: Surviving After Dodd-Frank’ (2011) 15 North Carolina Banking Institute 139. 10 FCA, The, Policy statement 14/4, The FCA’s Regulatory Approach to Crowdfunding over the Internet, and the Promotion of Non-Readily Realisable Securities by other Media (March 2014). FCA, The, A Review of the Regulatory Regime for Crowdfunding and the Promotion of Non-Readily Realisable Securities by Other Media (February 2015). 11 See also Robert Wardrop & Tania Ziegler, ‘A Case of Regulatory Evolution—A Review of the UK Financial Conduct Authority’s Approach to Crowdfunding’ (2016) 14 CESifo DICE Report 23. William Warren, ‘The Frontiers of Peer-to-Peer Lending: Thinking About a New Regulatory Approach’ (2016) 14 Duke Law & Technology Review 298. 12 The other two main missions of the P2PFA include: (a) to seek to secure public policy, regulatory and fiscal conditions that enable the UK-based peer-to-peer finance sector to compete fairly and grow responsibly; (b) to raise awareness and understanding of the benefits and risks of peer-to-peer finance (c) See further information at the official website of the P2PFA: <http://p2pfa.info/about-p2p-finance> accessed 01 November 2016. 13 See in general, Benjamin Lo, ‘It Ain't Broke: The Case for Continued SEC Regulation of P2P Lending’ (2016) 6 Harvard Business Law Review 87. Warren (n 11) 298. Magee (n 9). Andrew Verstein, ‘The Misregulation of Person-to- Person Lending’ (2011) 45 UC Davis Law Review 445. 14 The jurisdiction of the SEC over the P2P lending in the USA started in 2008, when one of the main P2P platforms, Prosper.com, was issued a Cease and Desist Order by the SEC. For further discussion on the regulatory structure of the USA, see eg, Verstein (n 13). Magee (n 9). 15 In addition to registering its securities under the Securities Act, P2P platforms must register their securitized loans in every State in which the securitized loans are offered for sale to the public unless an exemption from registration applies. 16 The Regulation of Marketplace Lending: A Summary of the Principal Issues (2015 Update). (Chapman and Cutler LLP, April 2015). 32. 17 The CFPB was established by the 2010 Dodd–Frank Act. Eric J Mogilnicki and Melissa S Malpass, ‘The First Year of the Consumer Financial Protection Bureau: An Overview’ (2013) 68 The Business Lawyer 557. Elizabeth Warren, ‘Unsafe at Any Rate: If It’s Good Enough for Microwaves, It’s Good Enough for Mortgages: Why We Need a Consumer Financial Product Safety Commission’ (2007) 7 DEMOCRACY: A Journal of Ideas 8. See also Warren (n 11). 18 Shen Wei, ‘Internet Lending in China: Status Quo, Potential Risks and Regulatory Options’ (2015) 31 Computer Law Security Review 793. 19 For example, Provisions of the Supreme People’s Court on Certain Issues concerning Application of Law in Trial of Cases involving Private Lending (Fa Shi [2015] No18); and Judicial Interpretations on Several Issues Concerning Implementation of Laws in Trial of Criminal Cases Relating Illegal Fundraising (Fa Shi [2010] No18). For a general discussion of the pre-existing provisions on the P2P lending: Shen Wei, ‘Designing Optimal Regulation for Financial Innovation in Capital Raising—Regulatory Options for China’s Peer-to-Peer Lending Sector’ (2016) 31 Banking & Finance Law Review 539. Yao Haifang et al., Chapter 4: Study on P2P Lending Regulation, in Renmin Chinese Law Review: Selected Papers of The Jurist (Jichun SHI ed 2015). Wei (n 18). Zhiyao Wang, ‘P2P Lending: Demand for Administrative Supervision and Reflection from Criminal Law’ (2015) 2 Oriental Law () 99. 20 There is further discussion below in the section ‘Propulsion of the P2P Lending Growth’ and section ‘Peril of the P2P Lending Market’. 21 The State Council of Peoples’ Republic of China, Press Release on The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries, 24 August 2016, <http://www.gov.cn/xinwen/2016-08/24/content_5102029.htm> accessed 01 October 2016. 22 The PPDai.com was mainly modelled on Prosper.com’s pure intermediary business model, whereby the platform handles the servicing of the loan on behalf of the matched borrowers and investors. See also Alec Macfarlane, Chinese Peer-to-Peer Lender Ppdai.com Plans U.S. IPO, The Wall Street Journal, 18 October 2016 . Available at <http://www.wsj.com/articles/chinese-peer-to-peer-lender-ppdai-com-plans-u-s-ipo-1476786906> accessed 20 October 2016. 23 The FCA, Call for Input to the Post-Implementation Review of the FCA’s Crowdfunding Rules, July 2016, s 1.18. 24 Pushing Boundaries (n 3). 25 Commission Staff Working Document on Crowdfunding in the EU Capital Markets Union (May 2016). 26 Breaking New Ground (n 3). 27 An IMF financial repression index measuring the extent of policy distortions in restricting market-based movement of the interest rate, exchange rate and funds, concluded that China is one of countries which has the most severe financial policy distortion. Abdul Abiad et al., A New Database of Financial Reforms (The International Monetary Fund 01 Dec. 2008). 28 Yiping Huang et al., Can the Internet Revolutionise Finance in China?, in China's New Sources of Economic Growth: Vol 1: Reform, Resources and Climate Change (Garnaut, Ross et al. eds, 2016). 29 The return peaked at 30 per cent in the middle of 2013. For the first time, the monthly average return has now reached its lowest, 9.83 per cent in September 2016. Data available at <http://shuju.wdzj.com/industry-list.html>. 30 P2P lending = the composite investors’ interest rates in all P2P platforms; Yu’ebao = online investment fund rate managed by Alibaba; WenZhou private lending = a representative lending rate of informal finance in China; Central Bank bill three months = rate of three-month bill from PBC; Shibor = weekly Shanghai Interbank Offered Rate. Yiping (n 28) (Garnaut, Ross, et al. eds., 2016). 31 Martin Chorzempa, P2P Series Part 1: Peering Into China’s Growing Peer-to-Peer Lending Market, Peterson Institute for International Economics (27 June 2016), available at <https://piie.com/blogs/china-economic-watch/p2p-series-part-1-peering-chinas-growing-peer-peer-lending-market#_ftnref5> accessed 1 November 2016. 32 Source: Internet Live Stats <http://www.internetlivestats.com/internet-users/> accessed 01 October 2016. 33 Online shopping in China has become a new phenomenon, as evidenced by the recent so called ‘Single Day Festival’ sale frenzy. See, eg, Cheang Ming, Singles' Day: Alibaba smashes records at world's largest online shopping event, CNBC, 11 Nov 2016. Available at: <http://www.cnbc.com/2016/11/11/singles-day-news-alibaba-poised-to-smash-records-at-worlds-largest-online-shopping-event.html> accessed 15 November 2016; Sherisse Pham, Alibaba's Singles Day: World's Biggest Shopping Bonanza Sets New Record, CNN, 11 Nov 2016. Available at: <http://money.cnn.com/2016/11/10/technology/alibaba-singles-day-shopping-festival-breaks-records/> accessed 15 November 2016. 34 Alipay has 451 million annual active users, while PayPal has about 180 million. Ant Financial to Evolve Into A Global Leading Fintech Company <http://www.alibabagroup.com/en/ir/pdf/160614/12.pdf 2016> accessed 01 October 2016. 35 Alibaba Group Holding Limited is the world’s largest retail platform. It, inter alia, operates the world's largest online business-to-business trading platform for small businesses (Alibaba.com); China’s largest consumer-to-consumer online shopping platform (Taobao.com); China’s largest business-to-consumer online shopping platform (Tmall.com), etc. 36 Huang et al. (n 28). 37 See also Melanie Lee, China's Nearly 700 Million Internet Users Are Hot For Online Finance, The Forbes, 25 Jan 2016. Available at: <http://www.forbes.com/sites/melanieleest/2016/01/25/chinas-nearly-700-million-internet-users-are-hot-for-online-finance/#33eaeba41391> accessed 05 October 2016. 38 Huang et al. (n 28). 39 Section 2, Implementation Opinions of the General Office of the State Council on Providing Financial Support for the Development of Small and Micro Enterprises, No 87 [2013] of the General Office of the State Council. The policy makers’ stance towards the P2P lending industry can also be found by their light regulatory approach toward other sectors of FinTech industry. For instance, trade and manufacturing companies are rarely granted finance-related operating licences in many jurisdictions. In China, however, e-commerce firms including Alibaba and Jingdong, or social media firms including Tencent, have been granted to entry into the online financial service market. Arner et al.(n 1). 40 Several Opinions of the State Council on Promoting Information Consumption and Boosting Domestic Demand (Documents of the State Council [2013] No 32). 41 Section 8, Guiding Opinions on Promoting the Healthy Development of Internet Finance 2015, Yin Fa [2015] No 221. 42 Further discussion on the Guiding Opinions is undertaken in the following section ‘First, the Precursory Regulatory Attempt’. 43 Xue Lei, ‘Discussion of the Risks and Risk Control of P2P in China’ (2016) 7 Modern Economy 399. Jianjun Li et al., ‘Risks of P2P Lending Platforms in China: Modeling Failure Using a Cox Hazard Model’ (2016) 49 The Chinese Economy 161. 44 Neil Gough, Online Lender Ezubao Took $7.6 Billion in Ponzi Scheme, The New York Times, 1 Feb 2016. Available at: <http://www.nytimes.com/2016/02/02/business/dealbook/ezubao-china-fraud.html?_r=1> accessed 05 September 2016. 45 Tom Mitchell, Arrests in China over $7.6bn Ponzi scheme, Financial Times, 1 Feb 2016. Available at: <https://www.ft.com/content/4ca011f4-c88f-11e5-a8ef-ea66e967dd44> accessed 05 September 2016. 46 Press Release, the Beijing People’s Procuratorate, No 1 Branch, 15 August 2016, available at: <http://www.bjjc.gov.cn/bjoweb/gsgg/89278.jhtml> accessed 05 September 2016. See also, Brenda Goh, China Calls for Crackdown on Illegal Fundraising Platforms, Reuters, 4 Feb 2016. Available at: <http://www.reuters.com/article/us-china-fraud-finance-idUSKCN0VE05R> accessed 05 September 2016. 47 A platform is identified as problematic if it records at least one of the following difficulties: termination of operation, failure to cash out, cheating, loss of contact, police interference or platform shutdown. Huang et al. (n 28). 48 See also Huang et al. (n 28). 49 They are, the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry of Finance, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Insurance Regulatory Commission, the China Internet Information Technology Office and the Legislative Affairs Office of the State Council. 50 s 1, the 2015 Guiding Opinions on Promoting the Healthy Development of Internet Finance. 51 ss 7–12, ibid. 52 s 13, ibid. 53 s 19, ibid. 54 s 8, ibid. 55 The P2P lending businesses, for example, are subject to the Provisions of the Supreme People’s Court on Certain Issues concerning Application of Law in Trial of Cases involving Private Lending (Private Lending Provisions) issued by the Supreme People’s Court on 6 August 2015. 56 Art 2(1), the Measures. The Measures do not apply to the establishment of financial guarantee companies, small loan companies and other financial companies. art 42, ibid. 57 Art 2(2), ibid. 58 Art 2, ibid. 59 Art 3(1), ibid. A complete list of prohibited services is prescribed under article 10, ibid; see further discussion in the section ‘The Negative List Based Approach to Curtail Administrative Costs’ below. 60 On 23 June 2015, the Supreme People’s Court released the Provisions on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases. Among others, art 22 differentiates between P2P platforms functioning as an information intermediary and those acting as a credit intermediary. When a P2P platform merely acts as an information intermediary, the Court would not apply a joint liability to the borrower and the platform. Otherwise, joint liability is applicable where the P2P platform acts as a credit intermediary asking for collateral to a loan. 61 Lo (n 13). 62 Art11, the Measures. 63 Art 14, ibid. 64 Art 15, ibid, 65 Arts 12–13, ibid. 66 Dan Awrey, ‘Law and Finance in the Chinese Shadow Banking System’ (2015) 48 Cornell International Law Journal 1. Yunlin Lu et al., ‘Shadow Banking and Firm Financing in China’ (2015) 36 International Review of Economics & Finance 40. Jianjun Li et al., ‘Shadow Banking in China: Institutional Risks’ (2014) 31 China Economic Review 119. See also in general: Shen Wei, Shadow Banking in China: Risk, Regulation and Policy (Edward Elgar Publishing 2016). 67 Harnessing Potential (n 3) 37. 68 Art 17(1), the Measures. 69 Art 17(2), ibid. 70 The CBRC & the MIIT, Press Release on The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries, 25 August 2016, s 2, available at: <http://www.miit.gov.cn/n1146295/n1652858/n1653018/c5218820/content.html> accessed 01 October 2016. 71 Art 4, the Measures. 72 Art 33(1), ibid. 73 Art 33(2), 39, ibid. 74 Huang et al. (n 28). 75 For example, Yirendai.com, one of China’s leading P2P lending platforms, has been listed on the NYSE and open to the global investors since 18 December 2015. See Yirendai (NYSE: YRD) Celebrates Initial Public Offering on NYSE, available at <https://www.nyse.com/events/2678265201/Yirendai-NYSE-YRD-Celebrates-Initial-Public-Offering-on-NYSE> Another platform, PPdai, is currently seeking IPO in the USA. Alec Macfarlane, Chinese Peer-to-Peer Lender Ppdai.com Plans U.S. IPO, The Wall Street Journal, 18 October 2016. Available at <http://www.wsj.com/articles/chinese-peer-to-peer-lender-ppdai-com-plans-u-s-ipo-1476786906> accessed on 20 October 2016. 76 Financial Times, Arrests in China over $7.6bn Ponzi scheme: Scam involving P2P lender allegedly defrauded almost 1m investors, 1 February 2016, available at: <https://www.ft.com/content/4ca011f4-c88f-11e5-a8ef-ea66e967dd44> accessed 01 October 2016. 77 The issuance of the ICP licence is subject to the rules under The Administrative Measures for the Licensing of Telecommunication Business Operations prescribed by the Ministry of Industry and Information Technology in 2009. 78 Art 4, the Measures. 79 Art 34, ibid. 80 See above notes 13–15 and accompanying text. See also, Verstein (n 13). 81 Art 2, the Securities Act 2014. 82 The CBRC & the MIIT, Press Release on The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries, 25 August 2016, s 6, available at: <http://www.miit.gov.cn/n1146295/n1652858/n1653018/c5218820/content.html> accessed 01 October 2016. 83 The Shanghai Pilot Free Trade Zone was officially launched in September 2013. It is not a traditional ‘free trade area’; instead, it is more like a trial arena for China’s new round of opening and reform strategy. Within this Zone, a set of innovative measures and procedures were explored and implemented with the liberalization of the capital and the facilitation of trade as the main objectives. See further discussion on the background and development of the Free Trade Zone at: Daqing Yao & John Whalley, ‘The China (Shanghai) Pilot Free Trade Zone: Background, Developments and Preliminary Assessment of Initial Impacts’ (2016) 39 The World Economy 2, Paul Kossof, ‘China's Pilot Free Trade Zone: Shanghai Free Trade Zone and the Potential Future of Free Trade Zones in Mainland China’(2014) 1 International Journal of Law and Legal Jurisprudence Studies 1. 84 Wei Shen & Matthias Vanhullebusch, ‘Where Is the Alchemy? The Experiment of the Shanghai Free Trade Zone in Freeing the Foreign Investment Regime in China’ (2015) 16 European Business Organization Law Review 321. 85 This pilot mechanism has now been incorporated into the most recent amendments to the nationwide foreign investment laws in China, according to which the existing approval requirements will be replaced by the filing procedure from October 2016. The 22nd Session of the Standing Committee of the 12th National People's Congress of the People's Republic of China, The Decision of the Standing Committee of the National People’s Congress on Amending Four Laws including ‘The Law of the People's Republic of China on Wholly Foreign-Owned Enterprises’ (President of the People's Republic of China (ed.), 03 September, 2016). Available at <http://cpc.people.com.cn/n1/2016/0905/c64387-28690242.html> accessed 09 September, 2016. 86 It is not permitted to conduct offline activities, unless for purposes of mitigating risks such as collecting and evaluating information, tracking the usage of the loans, managing mortgages and charges, or other necessary measures, art 16, the Measures. 87 The prohibited debt transference activities include packaged assets, securitized assets, entrusted assets, and fund shares, art 10 (8), ibid. 88 The China’s regulatory regime over the equity crowd-funding sector is in the process of becoming established. The Securities Association of China, the self-regulatory body of the securities market in China, published in December 2014 a draft code titled ‘Rules on Equity Crowd-Funding’ soliciting comments. See further at <http://www.sac.net.cn/tzgg/201412/t20141218_113326.html> accessed 10 September 2016. 89 See above footnote 86 and accompanying text. 90 The CBRC, Legislative Explanations of Key Questions Regarding the Draft Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries, 28 December 2015, s 6. Available at: <http://www.gov.cn/xinwen/2015-12/28/content_5028564.htm> accessed 01 October 2016. 91 Art 5 (2), the Measures. 92 Art 5, the Measures. 93 The specified guidance is due to be issued soon. art 5(5), ibid. 94 Further discussion of the information disclosure is undertaken in the section ‘The Information Disclosure Based Approach to Enhance Investor Protection’ below. 95 A crowdfunding firm holding an appropriate OFT licence before March 2014 was allowed to continue its crowdfunding business with an interim permission. Having an interim permission allows these firms to remain in the market pending application for full authorization. s 2.10, The FCA, PS14/4, The FCA’s Regulatory Approach to Crowdfunding Over the Internet. 96 Until 31 March 2017, the financial resources requirement is the higher of: 1. a fixed minimum amount of £20,000, or 2. a volume-based amount calculated as the sum of the following amounts of loaned funds outstanding: (a) 0.2 per cent of the first £50m (b) 0.15 per cent of the next £200m (c) 0.1 per cent of the next £250m, and (d) 0.05 per cent of any remaining balance above £500m The fixed minimum requirement will rise to £50,000 from 1 April 2017. The FCA, Call for Input to the Post-Implementation Review of the FCA’s Crowdfunding Rules, July 2016, s 2.31 97 The FCA, A Review of the Regulatory Regime for Crowdfunding and the Promotion of Non-Readily Realisable Securities by Other Media, s 44, February 2015 98 FCA, The, Policy statement 14/4, The FCA’s Regulatory Approach to Crowdfunding over the Internet, and the Promotion of Non-Readily Realisable Securities by other Media (March 2014) 24. 99 Robert Wardrop & Tania Ziegler, A Case of Regulatory Evolution—A Review of the UK Financial Conduct Authority’s Approach to Crowdfunding, 14 CESifo DICE Report 23(2016). Sean Farrell, Crowdfunders Caught in Logjam for FCA Approval, The Guardian, 9 March 2015. Available at: <https://www.theguardian.com/business/2015/mar/09/crowdfunders-caught-in-logjam-for-fca-approval> accessed 05 October 2016. 100 FCA, The, Call for Input to the Post-Implementation Review of the FCA’s Crowdfunding Rules (July 2016). s 1.18. 101 The conventional command-and-control regulation has been criticized for being ‘economically inefficient and for relying on the effectiveness of the regulator and its staff.’ Further discussion can be found in, eg, Rónán Kennedy, ‘Rethinking Reflexive Law for the Information Age: Hybrid and Flexible Regulation by Disclosure’ (2016) 7 George Washington University Energy and Environmental Law Review 124. 102 Mary Jo White, Chairman’s Address at SEC Speaks—‘Beyond Disclosure at the SEC in 2016’ (19 February 2016), available at <https://www.sec.gov/news/speech/white-speech-beyond-disclosure-at-the-sec-in-2016-021916.html > . Emilios Avgouleas, ‘What Future for Disclosure as a Regulatory Technique? Lessons from Behavioural Decision Theory and the Global Financial Crisis’ in Iain MacNeil & Justin O'Brien, eds, The Future of Financial Regulation. 103 FCA, The, Policy statement 14/4, The FCA’s Regulatory Approach to Crowdfunding over the Internet, and the Promotion of Non-Readily Realisable Securities by other Media (March 2014). s 3.40 104 ibid. s 3.41. 105 Art 30, the Measures. 106 For example, they may vet the borrowers in order to avoid fraudulent transactional information. art 32, ibid. 107 Art 31(1), ibid. 108 Art 31 (3) & (4), ibid. 109 Art 31 (5), ibid. 110 Li et al. (n 43). 111 See also Lei (n 43). 112 As discussed in the above section ‘The Negative List Based Approach to Curtail Administrative Costs’. 113 Ronald J Mann, ‘Regulating Internet Payment Intermediaries’ (2004) 82 Texas Law Review 681. For a general discussion of functions of third-party gatekeepers: eg, Yasuyuki Fuchita & Robert E Litan, Financial Gatekeepers: Can They Protect Investors? (Brookings Institution Press 2006). John C Coffee, Gatekeepers: The Professions and Corporate Governance (Oxford University Press 2006). 114 Art 22, the Provisions on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases, the Supreme People’s Court, 2015. 115 Art 35, the Measures. 116 The State Council of Peoples’ Republic of China, Press Release on The Interim Administrative Measures for the Business Activities of P2P Lending Information Intermediaries, 24 August 2016, s 3. Available at: <http://www.gov.cn/xinwen/2016-08/24/content_5102029.htm> accessed 01 October 2016. 117 See also Wei (n 19). 118 Art 42, the Measures 119 They are the CBRC, the State Development & Reform Commission, the Ministry of Industry & Information Technology, the Ministry of Finance, the Ministry of Commerce, the People’s Bank of China, and the State Administration for Industry & Commerce. 120 Art 2, Interim Measures for the Administration of Financing Guarantee Companies. 121 The full text is available at: <http://www.mofcom.gov.cn/article/b/g/201509/20150901125778.shtml> accessed 01 August 2016. 122 Art 2, Administrative Measures for the Financing Guarantee Companies. 123 Art 10 (2), the Measures. 124 Arts 28 & 35, ibid. 125 Wei (n 18). 126 Art 28, the Measures. 127 Ibid. 128 The Client Money Rules are outlined in the FCA Handbook in the section relating to their Client Asset Sourcebook rules (or CASS) related to ‘adequate protection’. 129 The full text is available at: <http://www.asiafinance.cn/jrzx/59582.jhtml> accessed 20 September 2016. 130 Arts 9 & 10, the draft Guidance for the Depository Scheme for the P2P Lending Business. 131 Art 11 (8), ibid. 132 Gough (n 44). See also Wang (n 19). 133 Sara Hsu, ‘China’s Ongoing Battle with Illegal Fundraising’ (2014) 28 The Diplomat. 134 For examples, the crime of fraudulent issuance of stocks and bonds (art 162), the crime of illegal absorption of public deposits (art 176), the crime of unauthorized issuance of stocks and bonds (art 179), the crime of fraudulent fund raising (art 192), the crime of illegal business operation (art 225), etc. The 1997 Criminal Act. 135 Laney Zhang, China: Death Penalty Crimes to Be Further Reduced, The Library of Congress (22 September 2015), available at <http://www.loc.gov/law/foreign-news/article/china-peoples-republic-of-death-penalty-crimes-to-be-further-reduced/> accessed 15 October 2016. Some commentators appear to miss the recent amendment by stating the illegal fund-raising activities are subject to the death penalty, see, eg Martin Chorzempa, P2P Series Part 1: Peering Into China’s Growing Peer-to-Peer Lending Market, Peterson Institute for International Economics (27 June 2016) <https://piie.com/blogs/china-economic-watch/p2p-series-part-1-peering-chinas-growing-peer-peer-lending-market#_ftnref5> accessed 10 September 2016. 136 ‘Collective investment scheme’ means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. s 235 (1), the FSMA 2000. 137 ss 19, 23(1), and 177(4)(a), the FSMA 2000. 138 [2014] EWCA Crim 1028. 139 The PBOC, Policy Brief on the Illegal Fundraising Activities, the 2013 Meeting of Interagency Anti-Illegal Fundraising Taskforce. Available at: <http://www.sdtvu.com.cn:10136/art/2016/6/1/art_7522_107381.html#_Toc11646> accessed 15 October 2016. Haifang et al. (n 19). 140 Wang (n 19). This online publication is an update of one of the same author’s journal articles: Zhiyao Wang, ‘P2P Lending: Demand for Administrative Supervision and Reflection from Criminal Law’ (2015) 2 Oriental Law () 99. 141 Art 176, the 1997 Criminal Act. 142 Art 3, The Judicial Interpretations (n 19). 143 For an individual borrower, the loan cap is CNY 200,000 from one single P2P platform, or CNY 1 million from multiple of P2P platforms; for an enterprise borrower, CNY 1 million or CNY 5 million, respectively. art 17(2). 144 Art 8(2), The Judicial Interpretations (n 19). 145 Wei (n 19). 146 See further in the section ‘Peril of the P2P Lending Market’ above. 147 Art 29, the Measures. 148 DISP 1.1 - 1.6, Dispute resolution: Complaints, the FCA Handbook. Available at: <https://www.handbook.fca.org.uk/handbook/DISP.pdf>. 149 COBS 14.3.7, Conduct of Business Sourcebook, the FCA Handbook. Available at: <https://www.handbook.fca.org.uk/handbook/COBS.pdf>. 150 Art 32, the Measures. 151 The FCA sets out a list of its perceived scenarios that may give rise to a conflict of interest. These scenarios arise or may arise during the firm providing any service referred to in SYSC 10.1.1 R. 152 The FCA rules require P2P lending firms to notify clients of conflicts of interest which cannot be avoided or addressed. SYS10.1.8. 153 T. J. Dunning, l. c., pp. 35, 36. Quoted by Karl Marx, Capital: A Critique of Political Economy, Volume I, page 540. 154 Dong Jing & Wang Yuqian, P2P Industry Struggles to Conform to New Restrictions (16 November 2016), available at <http://english.caixin.com/2016-11-16/101008181.html?sourceEntityId=101007859> accessed 17 November 2016. 155 ibid. © The Author(s) (2017). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com

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