Enhanced Supervision on the Cross-Border Supply of Financial Services in China

In December 2022, the China Securities Regulatory Commission (CSRC) issued a press release highlighting enforcement action taken against two overseas companies which operate fintech platforms (the Overseas Fintech Operators). Both Overseas Fintech Operators are licensed in Hong Kong, the United States and Singapore to provide securities trading and advisory services. However, neither of them was licensed by CSRC, but they conducted these activities to Chinese investors on a cross-border basis through their online platforms. In its press release, CSRC indicated that both Overseas Fintech Operators conducted securities business in China without having the requisite Chinese licences and were therefore ordered by CSRC to rectify this non-compliance within a designated period of time.

Shortly after this press release, on January 13, 2023, CSRC issued the Administrative Measures on Securities Brokerage Services (the Securities Brokerage Rules) which took effect on February 28, 2023. The Securities Brokerage Rules expressly set out that, unless otherwise permitted by CSRC, no overseas securities operation institution is allowed to engage in the marketing of overseas securities trading services and account opening services within the territory of China, directly or through its affiliated institutions or cooperative institutions.

This is not the first time that Chinese financial regulators have taken action in respect of financial services offered to China customers on a cross-border basis. In 2016, the China Insurance Regulatory Commission (the then regulator of insurance companies) issued a notice which provided that activities such as marketing offshore insurance products in China would be illegal.

The restrictions imposed by Chinese financial regulators derive from China’s commitments under the General Agreement on Trade in Services (GATS), under which most financial services cannot be offered by foreign entities on the basis of “cross-border supply”. Instead, they need to establish locally incorporated and licensed “commercial presences” in order to offer the relevant financial services to customers in China.

With the growth of fintech business, China has been particularly focusing on sanctioning any illegal activities which may breach the requirements under GATS. In recent years, the head of the Financial Stability Bureau of the People’s Bank of China (i.e. the central bank of China) has published a series of articles criticising various illegal activities, including the above.

The development of the internet and mobile apps no doubt provides the opportunity for financial services to be offered on a cross-border basis which is therefore attractive to foreign financial service providers. However, they should be mindful of the potential regulatory risks and seek legal advice before expanding their business into Chinese market.