Supervision over and Regulation of Operating Leasing: Principles and Directions
On January 8, the China Banking and Insurance Regulatory Commission released the Interim Supervisory and Regulatory Rules on Operating Leasing Companies (Draft for Comments) to solicit public opinions. This document contains 55 clauses in six chapters, including general provisions, operation rules, regulatory indicators, supervision and regulation, legal liabilities and supplemental provisions. This article offers a detailed interpretation on the clauses of the document, focusing on the business scope and prudential regulatory indicators.
The document says little about the industry’s development and largely references the regulatory approach for commercial banks without accommodating the industry’s uniqueness. The draft should be continuously improved by including regulatory requirements that reflect the industry’s characteristics.
Under the current central-local two-tier regulatory framework, local financial regulators must be equipped with adequate regulatory muscle to perform day-to-day supervision, especially classified supervision.
Participants in China’s financial leasing industry include operating leasing companies and financial leasing companies, which used to be subject to the regulation of the Ministry of Commerce and the then China Banking Regulatory Commission (CBRC), respectively. On April 20, 2018, the newly formed China Banking and Insurance Regulatory Commission (CBIRC) took over regulatory responsibilities for operating leasing companies, commercial factoring companies and pawn-broking business from the Ministry of Commerce.
The CBIRC is vested with powers to draft regulatory rules on operating leasing business, and local financial regulators are responsible for implementation. Such division of responsibility can be seen as a form of separate regulation and supervision, which makes sense in light of the numerous operating leasing firms in China with uneven levels of development. Over the years, Chinese financial regulators have followed the principle of equal powers and responsibilities, highlighting regulatory duties at the local level.
Recently, the CBIRC released the Interim Supervisory and Regulatory Rules on Operating Leasing Companies (Draft for Comments) as the first step for effectively regulating the financial leasing industry.
Specifically designed for the operating leasing industry, the document aims to enhance functional regulation as the National Financial Work Conference emphasized in 2017, i.e. the regulatory policy orientation, business rules and standards should be consistent for the same type of business to avoid uneven regulatory criteria for different market entities that beget regulatory arbitrage.
Compared with the Supervisory and Regulatory Rules on Operating Leasing Enterprises released by the Ministry of Commerce in 2013, the Draft for Comments has expanded the regulatory chapter. In terms of business scope, rules on business operation and supervision and regulation, the Draft for Comments is generally consistent with the Rules on Financial Leasing Companies released by CBIRC in 2014. As CBIRC-licensed non-banking financial institutions, financial leasing companies are subject to a high industry access threshold and stringent business regulation, higher than those for operating leasing companies. There are only 70 financial leasing companies in China, most of which are sponsored by commercial banks.
Judging by the content of this Draft for Comments, there are differences between financial leasing companies and operating leasing companies in terms of business scope, regulatory indicators, classified regulation and legal responsibilities. Such differences will continue to exist for a long time since many of the nearly 10,000 operating leasing companies in China are “empty-shell companies,” which must be cleared out if the industry is to develop healthily. Market clearing also creates a condition for unifying regulatory rules on the two types of leasing companies. The newly released Draft for Comments is succinct and involves numerous issues, but may require implementing rules in some respects to make it more operational. Here, I would like to share some of my opinions on the specific clauses of the Draft for Comments.