China releases draft rules to tighten P2P lending business

On 28 December 2015, the China Banking Regulatory Commission (CRBC), together with a number of other governmental authorities, jointly released draft Rules (Draft Rules) to regulate the Chinese peer-to-peer (P2P) lending market.

The Draft Rules were issued in response to the rapid but perceived “chaotic” development of the P2P lending market in China. It was reported that, by the end of November 2015, 2612 P2P lending platforms were successfully operating in China with an additional approximately 1000 platforms experiencing problems. Typical problems being encountered include platform operators being unable to repay the loans collected from the public through the platforms.

The Draft Rules, propose that P2P lending platform operators (Operators) should use their platforms to act as intermediaries between borrowers and lenders. They should not use the platforms to lend their own funds or raise finance for their own use. The Draft Rules set out a number of provisions to regulate the behavior of Operators and to mitigate financial risks.

Firstly, the Draft Rules require that all P2P lending platforms be registered with local banking regulators once they have received business licenses. The relevant filing records will be made publicly available to enable lenders to assess the Operators’ reliability, but the filing itself will not provide information on the Operators’ compliance or creditability.

Secondly, the Draft Rules require Operators to establish an information disclosure system. Operators will be required to publish on their platforms (1) operational information, such as lending turnover, overdue loans and bad loan ratios; and (2) information about specific loans, such as creditability of the borrower and usage of the loans.

Thirdly, Operators will be required to establish comprehensive information security systems. This will include installation of firewalls, encryption features, back-up and disaster recovery functions as well as implementation of proper managerial protocols so as to ensure the safe operation of the platforms and the security of lenders’ and borrowers’ information. Operators will also be required to retain details of borrowers’ and lenders’ data exchanges and surfing logs for a period of five years.

Fourthly, but most importantly, the Draft Rules set out a series of prohibited activities which Operators must not carry out, which include, among others:

1. borrowing money through their P2P lending platforms for their own use or for use by their affiliates
2. directly or indirectly pooling money from borrowers
3. providing guarantees or assurance for repayment of principals and/or interest 
4. marketing lending products to those other than users registered with their platforms on a real-name basis
5. distributing banking, security, fund, insurance, or trust products or tying lending products with banking, security, fund, insurance, or trust products sold by third parties
6. splitting financing projects, and
7. taking public deposit.

The deadline for comments on the Draft Rules is January 27, 2016. If the Draft Rules are adopted in their current form, existing Operators will be given a grace period of 18 months to rectify their non-compliance.