On September 13, 2020, the State Council promulgated the Decisions on Permitting and Management of Financial Holding Companies (in Chinese: 《国务院关于实施金融控股公司准入管理的决定》), which were further implemented by the Supervisory and Management Financial Holdco Measures for Financial Holding Companies (In Chinese: 《金融控股公司监督管理试行办法》) issued by the People’s Bank of China (the PBOC) on the same date (collectively the Financial Holdco Measures). The Financial Holdco Measures will become effective on November 1, 2020, and introduce a new financial licensing requirement and a new type of financial institution, the financial holding company (Financial Holdco).
The Financial Holdco Measures only apply to Financial Holdcos whose controlling shareholder(s) or de facto controller(s) are domestic non-financial enterprises, individuals and other recognised legal entities (the Non-FI Shareholder/Controller). Supervision of financial groups whose controlling shareholder(s) or de facto controller(s) are financial institutions, i.e. “FI Shareholder/Controller”, will be subject to separate legal regimes, though the aim is to apply the principles and standards set out in the Financial Holdco Measures by reference. Prior to the issuance of these Financial Holdco Measures, laws and regulations were already in place to regulate insurance holding groups.
Definition of a Financial Holdco
Pursuant to the Financial Holdco Measures, a Financial Holdco is legally defined as a limited liability company or a company limited by shares:
- Which controls or has actual controlling rights over two or more different types of financial institutions; and
- Which does not directly engage in any commercial profit making activities but only contributes equity investment and management.
Financial institutions controlled by a Financial Holdco
“Financial institutions” referred to in the Financial Holdco Measures include (i) commercial banks (excluding village banks) and financial leasing companies, (ii) trust companies, (iii) financial asset management companies, (iv) securities companies, mutual fund management companies, futures companies, (v) life insurance companies, property and casualty insurance companies, reinsurance companies and insurance asset management companies, and (vi) other companies recognised by Chinese financial regulators under the State Council. The Financial Holdco and its controlled onshore or offshore financial institutions are deemed to be a Financial Holding Group.
Other requirements for becoming a Financial Holdco
An entity (falling within the legal definition of a Financial Holdco mentioned above) will be incorporated as a Financial Holdco upon receiving PBOC approval if it meets the following mandatory qualification requirements of the Financial Holdco Measures:
- In the circumstance where the financial institutions controlled by such an entity include banks, the total assets of all the financial institutions are no less than RMB500 billion, or if the total assets of all the financial institutions are less than RMB500 billion, the total assets of all the financial institutions (excluding banks) are no less than RMB100 billion or the total assets under management of all the financial institutions (excluding banks) are no less than RMB500 billion; or
- In the circumstance where the financial institutions controlled by such an entity do not contain banks, the total assets of all the financial institutions are no less than RMB100 billion or the total assets under management of all the financial institutions are no less than RMB500 billion; or
- If neither of the above circumstances applies, an entity will be incorporated as a Financial Holdco if the PBOC considers it necessary.
For any existing entity which may have triggered the mandatory qualification requirements above, the PBOC requests the entity to apply for a licence from the PBOC within 12 months of the Financial Holdco Measures coming into effect. Otherwise, the PBOC can request that the entity transfer its stake in its controlled financial institutions or transfer its de facto controlling right to any other qualified entity.
The Financial Holdco Measures impose various other requirements. For example, the minimum paid-up registered capital of a Financial Holdco must be RMB5 billion, and that paid-up registered capital must be no less than 50 per cent of the aggregate registered capital of all the financial institutions that the Financial Holdco directly holds. Non-FI Shareholders/Controllers must use their own legitimate funds to invest into a Financial Holdco and are subject to various other qualification requirements and a five-year lock-up period after investment.
Restrictive and prohibitive requirements
The Financial Holdco Measures expressly prohibit any cross-shareholding in between financial institutions controlled by the same Financial Holdco or any reverse shareholding by any controlled financial institution in its parent Financial Holdco. A Non-FI Shareholder/Controller (together with its related parties or parties-in-concert) may invest in up to two Financial Holdcos as a major shareholder (holding 5 per cent or more but less than 50 per cent in each Financial Holdco), but can only invest into one Financial Holdco as a controlling shareholder (holding more than 50 per cent in the Financial Holdco).
Applicable to foreign entities?
As a Non-FI Shareholder/Controller is defined as a domestic entity or individual, the general understanding is that even if any foreign entity has established two or more financial institutions in China, that foreign entity will not be subject to these Financial Holdco Measures.
However, legally speaking, if a foreign entity has already established a foreign invested enterprise (as a Non-FI Shareholder/Controller) in China which in turn controls two or more financial institutions, that foreign invested enterprise and its controlled financial institutions will be subject to these Financial Holdco Measures. With the recent liberalisation of rules, it is much easier to invest foreign capital into the Chinese financial sector. It is anticipated that Financial Holding Groups involving foreign capital investment will be seen in the market.