Financial Law draft raises concerns over regulatory overreach
China’s Financial Law draft has raised industry concerns that it could give regulators unchecked power.
ICYDK: Last month, the Ministry of Justice (MoJ) and financial-sector regulators released a draft of the Financial Law.
- The law is intended to be China’s first overarching legal framework governing all “financial activities,” codifying baseline obligations for market participants and enforcement principles for regulators.
The problem: In trying to close every regulatory gap, the draft may also be casting the net too wide.
- Among other things, the draft expands financial regulators’ purview to include non-financial listed firms and their subsidies, as well as third-party service providers such as lawyers, accountants, rating agencies, and IT contractors.
- Legal experts told Caixin that this “catch-out” approach risks creating serious compliance strain for businesses far beyond the traditional financial sector.
The draft also authorizes financial regulators to apply quasi-judicial measures – from seizure and freezing orders to exit bans – but doesn’t clarify the procedures governing their use.
- Several experts, including an unnamed former central bank (PBoC) official, warned that the lack of constraints on regulators could leave those powers vulnerable to abuse.
Get smart: The law is meant to give Beijing a high-level legal basis to intervene in financial risks, especially in newer, lightly regulated areas that do not fit neatly within existing rules.
- That requires language both menacing enough to deter misconduct, and not too specific that it boxes regulators in during a crisis.
Get smarter: As a framework law, much of its real substance will only emerge through follow-on rulemaking and revisions to existing sector-specific laws.