Asset management arbitration cases in China

By Zhan Ling, China International Economic and Trade Arbitration Commission
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The wave of closures of P2P platforms in China in the summer of 2018 garnered national attention. The latest blacklist for P2P lending published by “P2PEYE.COM” (https://www.p2peye.com/platform/wenti) shows that as of the end of March 2019, the number of problematic P2P platforms reached 5,388.

Since 2018, there has been an explosive growth in the number of disputes in relation to asset management business in the market. The number of cases accepted by the courts and arbitration institutions in China has increased significantly, and they have involved issues with considerable value and significant social impact, thus attracting broad attention. The result from entering “asset management” in the search box of “China Judgments Online” (http://wenshu.court.gov.cn/Index) shows that the total number of relevant judgments uploaded by domestic courts exceeds 47,000.

In order to solve the various problems in the market for the time being – such as inconsistent regulatory rules and standards for similar asset-management businesses, nonstandard development of certain businesses, regulatory arbitrage, the multilayered nesting of products, rigid payments and circumvention of financial supervision − the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange jointly published the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (or the New Asset Management Rules) on 27 April 2018.

On 20 July 2018, the People’s Bank of China published the Notice on Further Clarifying Matters Concerning the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions; the China Banking and Insurance Regulatory Commission published a draft for comment on Measures for the Supervision and Administration of Wealth Management Businesses of Commercial Banks; the China Securities Regulatory Commission published a draft for comment on the Administrative Measures for Private Asset Management Business of Securities and Futures Operators, and a draft for comment on the Administrative Provisions on Operation of Private Asset Management Plans of Securities and Futures Operators. The above notices and administrative measures amend certain content in the New Asset Management Rules, for which supporting implementing regulations have been published.

Under the overall financial market background, the asset management cases accepted by the China International Economic and Trade Arbitration Commission (CIETAC) in recent years have the following main characteristics:

Rapid increase in the number of cases. Statistics show that the number of asset management cases accepted by CIETAC in 2017 and 2018 were three times and four times that of 2016, respectively, reflecting a rapid upward trend. The average number of cases accepted over three years also significantly exceeded that of prior years.

Diversified underlying transactions. Diversified underlying transactions include an asset management plan, an equity pledge guarantee, a share pledge-based repurchase, issuance of debt financing instruments, fund investment, bond investment and securities margin trading.

Dispute focuses. Common disputes can centre on “determination of the validity of an asset management contract”, the “information disclosure obligation and investors’ right to know”, “apparent agency”, the “capital guaranteed and income guaranteed clause”, “qualification and eligibility of the entity” and “obligations in relation to the margin call”.

Diverse parties concerned and complex legal relations. In the channel asset management business, various parties concerned and multilayer nesting businesses are involved, so it is necessary to determine the proper entity and underlying legal relationship of an arbitration case. The substantive laws involved in cases include the basic regulations such as the General Provisions of the Civil Law, the General Principles of the Civil Law and Contract Law, as well as slip laws including the Trust Law, the Securities Law and the Securities Investment Fund Law.

Significant changes in regulatory policies and inconsistent regulatory standards. There is an inextricable connection between the asset management business and industry policies. In addition to complying with basic laws and regulations, an asset management business shall comply with the regulatory requirements of department rules, including the Measures for the Administration of Information Disclosure of Securities Investment Fund, the Measures for the Administration of Securities Margin Trading Business of Securities Companies, and the Measures for the Pilot Program on the Asset Management Businesses of Futures Companies. Frequent changes and adjustments to policies will certainly lead to timely adjustments in regulatory requirements, which make it difficult for financial market participants to grasp the new standards in an appropriate and comprehensive manner.

Low settlement rate. Statistical data for asset management cases accepted by CIETAC over three years show that the average settlement rate is approximately 10%, as compared with the average settlement rate of 20% for traditional arbitration cases accepted by CIETAC (including those with an out-of-court settlement and/or mediated settlement).

Through analysis of over 100 judgments of CIETAC for closed cases over three years, the author finds that this is not unrelated to the types of parties concerned in the asset management cases. The applicants for asset management cases are mainly natural person investors, accounting for more than 80% of the number of applicants for all cases, while companies and limited partnerships only account for a small proportion. Mediation in arbitration cases depends entirely on party autonomy. Whether a case can be resolved through a settlement is directly related to the legal cognition of the parties concerned, the lawyer’s level, perceptivity and other factors.

In other words, through the analysis of a series of adjudicated cases, it is not difficult to find that in the face of a sudden increase and various forms of asset management disputes, all judges follow the same basic principles. Under the existing legal framework, on the one hand, judges are encouraging market transactions, respecting market rationality and leaving room for financial innovation; on the other hand, they are adhering to the principle of good faith and providing arbitration services and legal safeguards for deleveraging and risk prevention with the shift from the fictitious economy to the real economy in financial markets.

Zhan Ling is a senior case manager at China International Economic and Trade Arbitration Commission