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Absolute Accuracy

Companies – especially financial institutions – need to provide increasing volumes of hard evidence to prove to regulators they’re playing by the changing and ever-more complex rules.

“The Chinese market has undergone a major change over the past 20 years,” says Wantao Yang, partner at Zhong Lun Law Firm, specialized in regulation for banking and financial services. “The financial system used to be based mainly on savings deposits and trading, so regulation and risk compliance was relatively simple. But now there’s an abundance of products for investors to choose from: and that brings different risks in need of regulation.”

So, as China prepares to step onto the world stage as one of the most strategically important financial players, its government is raising the bar on financial regulation – and fast. While it continues to open its doors to foreign investors, regulatory requirements for financial service firms doing business in the country are increasingly stringent.

“China had many more reporting requirements in the past, but they were less sophisticated,” says Michael Thomas, Regional Director North Asia at  Wolters Kluwer Financial Services. “This is starting to change now.”

At present, it’s a fragmented regulatory environment with an abundance of authorities. The main financial supervisors include the China Banking Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission. All are designed to regulate different sub-sectors.

But as financial markets evolve and products become more complex, boundaries between the regulators are blurring. “This leads to overlapping regulations, or even conflicting standards, which leads to markets ‘shopping around’ regulators,” says Yang.

Last October, the government announced the creation of an overarching ‘super-regulator,’ led by the central bank, to coordinate financial supervision and bolster regulation in the financial sector. The super-regulator is expected to reduce these conflicts through better coordination.

One of the hottest issues is anti-money laundering (AML). Tackling fraud and corruption has been high on the agenda of China´s present leadership since it took office in 2012, and AML regulation is a key element of its policy.

A steady stream of AML regulations has been launched since 2007, when China became a member of the Financial Action Task Force, an international money laundering and terrorism financing watchdog. As soon as they were published, they became freely available to criminals and terrorists who were quick to find ways to bypass them, long before financial institutions were able to implement them.

In recent years, the pace of change around anti-money laundering and terrorist financing regulation has been faster than ever before. In 2012, the People’s Bank of China, the central bank, issued new AML rules for financial institutions as part of its risk assessment for money laundering and terrorist financing. The move followed watchdog groups’ claims that trillions of dollars had been laundered over the past decade.

More legislation bringing more detailed compliance requirements is expected in 2014. The latest guidelines require financial institutions to conduct a thorough risk-weighting assessment of all their clients. Financial institutions must rate those risks based on their client’s location and the nature of their businesses, including their levels of transparency. They must submit this data to the People’s Bank of China by December 2015.

“That will be no mean feat,” says Thomas. “These institutions possess some of the largest client bases in the world. The amount of data they have to manage is enormous. And the solutions currently being used in China are lagging international standards.”

Knowledge Levels
As China’s regulatory requirements tighten, it is facing a pressing problem: a lack of knowledge. “China is suffering from a brain drain,” says Thomas. “The banking sector is overflowing with workers, but there’s a severe shortage of international expertise and experienced staff.”

With more and more complex products rapidly entering the Chinese market, finance professionals are struggling to keep pace with developments and regulations. Whereas developed markets have typically seen a gradual introduction over a long period of time, China’s regulators, financial institutions, lawyers, and investors all need to understand the mechanisms quickly. But grasping these complex products and putting the right regulating regimes in place is a process – and processes take time.

Wolters Kluwer aims to help its customers in China increase their knowledge levels. “Those customers range from major global banks to foreign banks with small operations in the country,” says Yong Zhao, Professional Services Manager at Wolters Kluwer Financial Services. “It’s especially challenging for those smaller banks to understand all the requirements from regulators, as they often lack the resources or experience. We provide training, help them understand regulatory requirements, and offer solutions that address their needs,” he explains.

“Our strength is that we are able to respond quickly to the changes in regulatory requirements,” says Kevin Fang, R&D Manager at Wolters Kluwer Financial Services. “We also closely listen to our customers’ needs, incorporating their feedback into our constantly evolving products.”

In October 2013, Wolters Kluwer launched its anti-money laundering solution for financial institutions operating in China. The system can help institutions detect and report suspicious activity in order to comply with guidelines administered by regulatory authorities governing China and the Asia Pacific region.