ChapterⅠ: General Provisions
Article 1 In order to encourage financial innovation, supervise innovative activities, and speed up healthy and continuous development of new banking products and services, this guideline has been introduced in compliance with the Law of the People’s Republic of China on Banking Regulation and Supervision, the Commercial Banks Law of the People’s Republic of China, and other related laws and regulations.
Article 2 These Guidelines apply to all the Chinese commercial banks, wholly foreign-funded banks and Chinese-foreign joint venture banks that incorporated within the territory of the People’s Republic of China.
These Guidelines apply mutatis mutandis to all financial innovation activities of the policy banks, rural cooperative banks, city credit cooperatives, rural credit cooperatives, foreign bank branches and other regulated banking institutions that incorporated within the territory of the People’s Republic of China.
These Guidelines apply mutatis mutandis to all the asset management companies, investment and trust companies, financial leasing companies and other regulated non-bank financial institutions that incorporated within the territory of the People’s Republic of China.
Article 3 Financial innovation could be interpreted as commercial banks carrying out any innovative activities in order to meet the need of the development of the real economy, including the reform of strategic decision, institutional arrangements, organizational arrangements, human resources, management methods, operational processes, and financial products through introducing new technology, using new techniques, pitching new markets and creating new organizational structure. Ultimately, financial innovation represents the continuous improvement of risk management ability, creation and update of the range, quality and level of products and service choices for the consumers and enterprises.
Article 4 Financial innovation places the interests of the consumers at the core, and follows basic market principles in approach. Through financial innovation, commercial banks raise their competitive strengths, improve their risk management skills, and better satisfy the needs of their customers and market requirements. Financial innovation is one of the most important elements of the commercial banks’ sustainable growth strategy.
Article 5 Commercial banks should understand that financial innovations and risk management are two sides of the same coin. A pre-condition of financial innovation is proper risk management. Commercial banks must identify, measure, monitor and control new risks on a timely basis.
Article 6 The commercial banks must ensure that they have sufficient resources in place for financial innovation, such as human resources, capital, IT infrastructure, internal control, risk management and other relevant aspects.
Article 7 The China Banking Regulatory Commission (hereinafter the CBRC) takes the promotion of financial stability and the advancement of financial innovation as the prime criteria of sound supervision. To encourage financial innovation and market development, as well as to promote risk management are the supervisory principles of the CBRC. The CBRC regulates and supervises all innovative activities in compliance with the laws, appropriate regulatory guidelines and best market practice.
Article 8 The CBRC will proactively review the existing laws, regulations and guidelines, thus creating a sound legal environment to foster the development of financial innovation. In order to raise the overall efficiency and effectiveness of regulatory oversight, the CBRC will promote the amendment of the laws and regulations that are not appropriate for financial innovation, and review and update existing laws and regulations by taking into consideration of the changes in market environment and public needs.
Article 9 The CBRC will promote sound development of the market that is conducive to financial innovation, promote financial innovation under the principles of fair trade, and promote the creation of a marketplace with fair competition and fair treatment of consumers so that there shall be orderliness and stability in the financial market.
Chapter Ⅱ: Fundamental Principles
Article 10 In the process of financial innovation, the commercial banks shall ensure that there shall be full conformance with all relevant laws, regulations, administrative rules and guidelines issued by the CBRC and other regulatory authorities. No commercial bank is allowed to use the guise of financial innovation for the purpose of contravention of existing laws, regulations, administrative rules and guidelines, and thus, evading regulation measures.
Article 11 In the process of financial innovation, the commercial banks shall innovate under the principle of fair competition, other than the use of proprietary information, patents and rights. The commercial banks shall refrain from anti-competitive behaviors, price-fixing and aggressive pricing competition.
Article 12 In the process of financial innovation, commercial banks shall respect intellectual property rights of other parties as well as their own. No commercial banks shall infringe other parties’ intellectual property rights or commercial secrets. In order to protect their own products and services innovation, the commercial banks should establish an effective strategy of protection of intellectual property rights.
Article 13 In the process of financial innovation, commercial banks should stick to the principles that the business costs can be calculated, risks can be controlled and relevant information shall be thoroughly disclosed.
Article 14 In the process of financial innovation, commercial banks should “know your business”. The Board and senior management of the commercial banks should have a full understanding of activities of financial innovation committed by their banks, and implement necessary measures to acquire information on development of innovative products and its market in a timely manner.
Article 15 In the process of financial innovation, commercial banks should “know your risks”. The Board and senior management of the commercial banks should have an adequate awareness and appreciation of the risks associated with financial innovation activities, formulate regular review of the risk profile and allocation of risk limits, which enables financial innovation activities to be within the risk controls.
Article 16 In the process of financial innovation, commercial banks should “know your customers”. Commercial banks shall put in place appropriate Customer Profile database and undertake due verification of the accuracy, needs, risk tolerance and suitability of the customer. The commercial banks shall not provide services and products that do not meet the needs and risk capacity of the customer.
Article 17 In the process of financial innovation, the commercial banks should “know your counter-parties”. When conducting investment and trading related activities, commercial banks shall analyze the counter-party credit risk, market risk and legal risk, and put in place appropriate management of risk exposures to their counter-parties. Especially when there are significant changes in market environment, the banks shall track the risk profiles of their counter-parties closely, and take effective countermeasures to withstand risks.
Article 18 In introducing financial innovation, the commercial banks must comply with the code of conduct, and business and professional ethics, undertaking due diligence and due care to fully protect the interests of the consumers and investors.
Chapter Ⅲ: Management Mechanism
Article 19 The Board of Directors of the commercial banks is responsible for formulating strategy and establishing the risk management policies with respect to financial innovation, and monitoring their implementations. The Board should ensure that the senior Management team has sufficient financial resources and qualified personnel to implement strategy and manage the risks associated with the process of financial innovation. The Board should ensure that the innovation strategy and policy fit in with the overall development strategy and risk management policy of the commercial bank as a whole.
The senior Management team is responsible for the proper implementation of the financial innovation strategy and risk management policy. The implementation shall include the establishment of appropriate risk management and internal control system, the proper documentation and audit trail of business processes, and the appropriate training and feedback on the delivery of the new business services and products.
Article 20 Commercial banks shall endeavor to improve their organization structure and business management in processing, which provide efficient operations with proper coordination and segregation of the duties and responsibilities between the front office, middle office and back office operations. The commercial banks are encouraged to reform from the current “department banking” to “process banking”, which enables risk segregation together with the efficient co-ordination.
Article 21 The commercial banks shall put in place appropriate project management to monitor the innovative projects in terms of their terms of reference and scope, design, implementation, testing, risk and quality assurance, approval, delivery, training, sales, post-implementation，stress-testing and process-upgrade stages. The business process must include the analysis of market needs, targeted customers and cost-benefit, as well as scientific risk evaluation and pricing process, with which the risk-adjusted return can be accurately calculated.
Article 22 The commercial banks shall have proper documentation process, which identifies the audit trail, operational responsibilities and provides proper process manual and user or consumer explanatory material, before any financial innovation.
Article 23 The commercial banks must ensure that the IT infrastructure, systems and application can fully support the financial innovation, so that there is data integrity with robust business continuity plans and process in place, thus, increasing the sophistication of financial innovation.
Article 24 The commercial banks shall construct the customer-base management system, integrate the customer relationship and data systems so that the customer can have an integrated understanding and access to information and relationship with the commercial banks as a whole, and provide more value-added new products and services. The objective is to enhance the level of customer service and satisfaction with the financial innovation.
Article 25 The commercial banks shall establish proper quality control and performance review systems in regard to financial innovation. An appropriate incentive structure shall be put in place to encourage further financial innovation.
Article 26 The commercial banks shall progressively introduce an appropriate remuneration, training and human resource strategy, so as to attract professional talents with necessary skills and rich experience, thereby enhancing the overall capabilities of financial innovation.
Article 27 The commercial banks shall organize the appropriate staff training so that the staff are familiar with new products, services and processes, with due regard to their qualification, experience and quality assurance. For financial innovation processes, the staff must have the necessary qualifications, experience and thorough knowledge of the law, guidelines and risks associated with financial innovation.
Chapter IV: Consumer Interests Protection
Article 28 The commercial banks shall properly disclose without any misleading, to the consumer all rights, obligations and risks relating to the new products and services under the banking code of conduct, rules for staff integrity and the principles of fair treatment of consumers.
Article 29 The commercial banks shall avoid the loss or accidental leakage of private information of customers subject to the legal requirements and contractual terms.
Article 30 The commercial banks shall ensure that the customers are given professional, objective and fair advice, and in accordance with the legal requirements that attach importance to treating customers with fiduciary and trust-worthy services.
Article 31 The commercial banks shall identify and avoid all conflicts of interest inherent in the financial innovation, and deal with any conflicts of interests between banks and their customers as well as those between the banks and the third-party service providers fairly.
Article 32 The commercial banks shall ensure that client assets are strictly and adequately separated from their own assets and that there is effective risk segregation and protection of their customer assets.
Article 33 The commercial banks shall have proper recording of client profile to meet the needs of innovative services and assess the suitability of the new products and services for the customers to help customers make rational investment and consumption decisions.
Article 34 The commercial banks shall have in place the effective handling procedures for customer complaints, through which, customer complaints could be dealt with on a timely basis. Customer complaints shall also be analyzed, summarized, and reported to relevant departments and people within the banks together with solutions. The banks shall regularly review customer complaints and suggestions to improve the service quality of financial innovation.
Charter Ⅴ Risk Management
Article 35 The Board and Management of the commercial banks shall ensure that the risk management of financial innovation activities are integrated with the bank-wide risk management system.
The Risk Management Committee of the Board shall oversee the whole risk management system and measures implemented by the Management and lay down roles and responsibilities of staff involved in the financial innovation and risk management processes.
Article 36 The commercial banks shall establish clear risk management policies, procedures and risk limits to ensure that financial innovation activities should keep pace with the management ability and professional level.
Article 37 The commercial banks shall put in place effective and robust IT and communication systems, that support the risk management system to identify, measure, hedge and control the risks associated with financial innovation.
Article 38 The commercial banks shall put in place appropriate internal and external control mechanisms that shall report regularly and independently to the Board to ensure that the financial innovation processes are operating efficiently.
Article 39 The commercial banks shall put in place appropriate processes and structures to ensure that the financial innovation processes are fully compliant with all laws, regulations and guidelines, including anti-money laundering, private privacy rules and procedures.
Article 40 The commercial banks should periodically review and modify if necessary the key models, assumptions and input, and verify the data integrity in order to accurately measure the risks of financial innovation according to the policy adjustment and environmental change. The commercial banks shall also put in place appropriate risk warning and monitoring systems, so that appropriate mitigation steps can be taken. The Board and Management shall be responsible for putting into place appropriate emergency measures and business continuity programmes.
Chapter Ⅵ: Supervision
Article 41 The CBRC encourages commercial banks to meet the following prudential conditions in financial innovation activities: -
1. Full compliance with capital adequacy guidelines
2. Strong corporate governance performance
3. Adequate internal controls and measure
4. Risk management performance meets all prudential standards
5. No serious infringements of regulatory and supervisory guidelines, directives, laws and regulations in the last three years.
Article 42 To facilitate financial innovation, the CBRC shall further streamline approval procedures, upgrade supervisory methodology, formulate prudential supervisory standard and operational processes, pay more attention to the ongoing supervision of financial innovation, strengthen the monitoring and control of the risks associated with innovative activities, including those arising in the process of internal audit, pricing and information disclosure, and provide risk warning in a timely manner.
Article 43 The CBRC supports and encourages the commercial banks to engage in preparatory and technical discussions on the financial innovation work, so that all applications can be expeditiously processed.
Article 44 The CBRC encourages the commercial banks to work with the regulators in an open and cooperative manner when conducting financial innovation business, and report timely to the regulators on the risk events and the material changes in the market.
Article 45 The commercial banks, as well as the CBRC and the China Banking Association have the obligations to promote investor education, raise the standard investor knowledge of new financial products and their risk management ability.
Article 46 When a commercial bank infringes these guidelines, it shall be subject to administrative sanctions by the CBRC according to the existing laws and regulations, and the CBRC shall apply other appropriate regulatory resorts as well.
ChapterⅦ: Supplementary Provisions
Article 47 The CBRC is the authoritative interpreter of these Guidelines.
Article 48 These Guidelines shall come into effect on 11 December 2006.
