China regulator updates corporate governance assessment rules for FI

On 28 November 2022, the China Banking and Insurance Regulatory Commission (CBIRC) published Measures for the Regulatory Assessment of Corporate Governance of Banking and Insurance Institutions (Assessment Measures). The Assessment Measures are an update to the same trial measures initially published in 2019 and the results of a three year campaign for improving corporate governance at banking and insurance companies from 2020 and 2022.

There are several notable updates for the Assessment Measures which we have summarised below.

• Expansion of assessment targets

  In addition to the commercial banks, insurance companies, the Assessment Measures specifically expanded assessment targets to include other non-banking financial institutions, such as financial asset management companies, financial leasing companies, finance companies of enterprise groups, auto finance companies, consumer finance companies, and currency brokerage companies. CBIRC will enhance its regulatory actions over such non-banking financial institutions as a result of assessment of corporate governance.

• Frequency of assessment

  Regulatory assessment over corporate governance shall be conducted annually. However, for targets with grade B or above ratings in previous assessment may be allowed to conduct assessment every two years. Assessment will be conducted by both onsite and offsite means. Onsite assessment by the CBIRC or its local branches will cover all targets every three years. The onsite assessment will include means as onsite access to materials, inquiry in the system, and interviews with directors, supervisors, and senior executives, etc. The offsite assessment mainly covers the self-assessment reports, the relevant supporting materials submitted by the financial institutions, as well as the information obtained from the routine offsite supervision and preliminary onsite inspections. In particular, the CBIRC will implement the “substance over formality” principle in carrying out both onsite and offsite assessments.

• Dynamic assessment plans

  Instead of a fixed or standard assessment, the CBIRC shall, “based on changes in such factors as macroeconomic and financial situation, risk characteristics of corporate governance in the industry, regulatory rules, and focuses each year, make the annual plan for the regulatory assessment of corporate governance, specify the assessment targets, assessment points, scoring standards, and specific arrangements for the current year”. Therefore, the CBIRC will implement a dynamic assessment plan each year with different focuses. Further, even after the completion of assessment, the CBIRC may randomly select certain targets for re-assessment in order to improve consistency over assessment standards. This will present more challenges to financial institutions to meet different priorities set by the CBIRC on an annual basis. Consequentially, a financial institution must improve its corporate governance standards to a new high level in order to pass assessment.

• Notable deadlines

  Financial institutions shall submit self assessment reports by the end of February (which was extended from the end of January under the 2019 trial measures). CBIRC or its local branches shall complete assessment work before the end of each May. Assessment review or re-assessment (where necessary) shall be conducted by the CBIRC or its local branches before the end of each June. Feedbacks on the assessment from the CBIRC to financial institutions shall be completed before the end of each July.

• Reemphasis of regulatory measures for low rating targets

  For targets with grade C, D or E ratings, special regulatory measures will be implemented by the CBIRC, including risk warning letters, regulatory opinion, public denouncement, rectification within designated period, etc. Especially for targets with D or E ratings, the CBIRC may even request the financial institutions to adjust their personnel, suspension of business operation, suspension of new business launches, suspension of establishment of new branches, restriction of dividend payments, restriction of credit granting, fund use and fund-based affiliated transactions, etc. Further, according to the Assessment Measures, the CBIRC may share the results and specific information on the regulatory assessment of corporate governance with other relevant government departments.

The Assessment Measures represent new regulatory trends for financial institutions operating in China. In light of the new requirements and dynamic assessment approach, high standard of corporate governance will be an important workstream in the daily operations for financial institutions in China.