Potential administrative penalties under strong financial regulatory enforcement

According to the China Bank and Insurance Regulatory Commission (CBIRC), in the first quarter of 2018, CBIRC (established by merging the former China Bank Regulatory Commission and China Insurance Regulatory Commission) carried out enforcements against various violations, such as defective corporate governance, violation of macro-control policies, illegal arbitrage of intersectional financial products, infringement of rights and interests of financial consumers, and formulation or provision of false insurance materials. CBIRC strictly imposed administrative penalties on both institutions and responsible individuals violating the regulations during the law enforcement practice.

The Guiding Opinions on Regulating Asset Management Business of Financial Institutions (New Asset Management Regulations) was officially promulgated on 27 April 2018. Aimed at the abuse of arbitrage resulting from different standards enacted by separated supervisions, supervision concepts embodied in the New Asset Management Regulations strengthen supervision coordination and macro prudence management. Financial administrative authorities will strengthen their functional supervision over market access and their daily supervision over asset management business. It is predicted that more compliance disputes and penalties will arise out of asset management business during the implementation of the New Asset Management Regulations.

During the administrative investigation and penalty procedure carried out by administrative authorities, the supervised institutions and individuals can exercise their rights as provided in the laws and regulations to protect their legitimate interests, such as stating their cases, defending themselves and applying for a hearing. Currently the CBIRC strictly imposes administrative penalties on both institutions and responsible individuals violating the regulations. Therefore, further developments of both financial institutions and its practitioners will be greatly influenced no matter if the violation is committed only by an institution or together by an institution and individuals.

Taking the former CBRC regulations as an example, the administrative investigation and penalty procedure can be roughly divided into four stages:

(1) Investigation

When a party is suspected of committing a violation, the supervision and inspection department would initiate an inspection and, if the conditions for filing an administrative penalty case are fulfilled, officially set up a case within five days upon the completion of the inspection. The supervision and inspection department shall complete the investigation within 90 days after setting up the case (which can be extended upon approval) and later transfer the case to the administrative penalty committee office.

(2) Notification

The administrative penalty committee office shall decide whether to accept the transferred case within five days and, if accepting the case, complete the review within 60 days (which can be extended upon approval and be recalculated in case of return for supplementary investigation, the time limit of which normally cannot exceed 30 days). If the administrative penalty committee, in its review conference, decides to impose administrative penalties, a notification of proposed administrative penalties shall be made and delivered to the party.

(3) Defending and hearing

After receiving the notification of proposed administrative penalties, the party shall submit written materials within 10 days and an application for a hearing within five days (for potential serious administrative penalties) to the administrative authority, if it needs to state its case and defend itself. The administrative authority shall hold a hearing within 30 days after receiving the application and decide whether to finally issue a written decision of administrative penalties after hearing the party’s arguments.

(4) Enforcement

After the administrative authority imposes administrative penalties of fines or confiscation of illegal gains, the party shall make the payment within 15 days upon receiving the written decision of administrative penalties. If the party truly has financial difficulties, the payment may be put off for the time being or made in installments upon the administrative authority’s approval. If the party fails to pay within the time limit, the administrative authority can impose an additional fine at the rate of 3% of the amount of the fine per day or apply to a People’s Court for compulsory enforcement.

Since most of supervised parties are institutions, they often prefer not to defend themselves or apply for a hearing. We propose a better way to respond to administrative investigations and potential penalties, which is to legally exercise rights as provided in laws and regulations, to launch sufficient and effective communication with administrative authorities, and to understand the rational of the supervision and enforcement. Our suggestions are as follows:

(1) Cooperate with the investigation and state truthfully

When facing an administrative investigation, the parties have the obligation to cooperate with the investigation, including arranging relevant individuals for inquiry, providing relevant materials, making factual statements and so on. During the administrative proceeding, any falsification of evidence or distortion of fact could lead to an increase of administrative penalties.

(2) Explain sufficiently and defend legitimately

Actively cooperating with investigation does not mean giving up any legitimate rights. Authorities provide the parties sufficient chances to clarify facts, state their cases and defend themselves during the whole procedure, from the very beginning of discovery of suspected violations to the final decision of administrative penalties, which can be found both in the administrative authorities’ design of the whole procedure and in their mindsets. For example, during the inspection and investigation stage, the party can submit written documents to adequately state facts, explain its own subjective views and analyze objective consequences of its behaviours. After receiving the notification of proposed administrative penalties, the party can also make written statements and defence, and communicate with or make arguments in front of members of the administrative penalty committee in person.

(3) Learn a lesson and pay attention to compliance

No matter if administrative penalties are finally imposed or not, financial institutions shall always learn a lesson from the whole process, understand the rational of supervision and enforcement through sufficient communication with the administrative authorities, improve compliance systems, enact bylaws and regulations and facilitate the implementation of such bylaws and regulations in order to guarantee the normative operation of their business and to maintain the stable development of financial markets.

Liu Siyuan is a partner in the securities department at Jingtian & Gongcheng