In order to further strengthen the supervision of auto finance companies and promote the healthy development of China’s auto finance industry, the State Administration of Financial Supervision and Administration (“SAFSA”) recently revised the 2008 version of the Administrative Measures for Auto Finance Companies, new version of the Administrative Measures for Auto Finance Companies (“Measures”), which strengthens the supervision on the risk and guides auto finance companies to focus on their main business and increase risk management requirements and refine risk control. The Measures will come into effect on 11 August 2023.
The Measures consist of seven chapters and 68 articles, adding relevant requirements on the governance, risk management, internal control, and compliance of automobile finance companies, in addition to adjusting the relevant requirements on the scope of business and the qualification of funders. The highlights of this revision include:
1） In terms of industry access, the minimum registered capital of auto finance companies has been raised to RMB 1 billion; the annual operating income requirement for non-financial institution funders has been substantially raised from RMB 5 billion to RMB 50 billion or its equivalent in currency, and the main non-financial institution funders are required to have sufficient scale of automobile production and sales to support the auto finance business;2） In terms of business scope, in order to guide auto finance companies to focus on their main business, auto finance companies are prohibited from engaging in equity investment in financial institutions; auto finance companies are permitted to issue non-capital bonds; in order to adapt to the market demand of the automobile industry, financing of automobile add-ons is formally included in the scope of business, and customers are permitted to apply for financing of add-ons after applying for an automobile loan; loans for the purchase of inventories, maintenance, and equipment purchase are permitted to be provided to after-sales service providers; the leaseback mode of financing is permitted; and it is stipulated that the leaseback business must be based on the real trade background of the vehicle;3） In terms of risk management, new requirements on corporate governance and internal control have been added to strengthen the supervision of equity management, including “three chambers and one layer”, connected transactions, information disclosure, protection of consumer rights and interests, external auditing and information systems;4） Auto finance companies may set up offshore subsidiaries.
More detailed provisions and interpretations are set out below:
1. Increased requirements for establishment conditions
The Measures have added new provisions requiring automobile finance companies to configure information systems, technologies and corresponding measures that are compatible with business operations. In addition, major changes in the conditions for the establishment of automobile finance companies include:1） Banks will not be allowed to participate in the auto finance company as a contributor, and the main contributor should be “automobile vehicle manufacturers or non-bank financial institutions”;2） The minimum registered capital is raised from RMB 500 million to RMB 1 billion or its equivalent in currency;3） Regardless of non-financial institutions and non-banking financial institutions, the balance of equity investment shall not exceed 50% of the net assets of the enterprise (including investment in the relevant automobile finance company), the major shareholders are restricted from transferring their shares within five years and shall not set up pledges or trusts;4） The non-financial institution funder of the auto finance company (i.e., an automobile manufacturer) should have a revenue of not less than RMB 50 billion at the end of the most recent fiscal year;5） Non-banking financial institutions as major contributors should have more than five years of experience in automobile consumer credit business management and risk control.
2. Corporate governance, internal controls
The Measures require automobile finance companies to establish a sound corporate governance structure and, taking into account the characteristics of the automobile finance industry, put forward specific requirements for governance bodies such as shareholders, the board of directors, the supervisory board or full-time supervisors, and the senior management, so as to strengthen the construction of corporate governance with the characteristics of automobile finance companies. For example, article 28 of the Measures stipulates that “an automobile finance company shall set out in its articles of association that its major shareholders shall, if necessary, supplement capital to the company and provide liquidity support when the company has payment difficulties.” In addition to the corporate governance mechanism, at the level of internal system construction, the Measures put forward detailed new requirements in light of the characteristics of the industry, requiring automobile finance companies to formulate and improve internal systems in line with their own operating characteristics, including the management system of related transactions, annual information disclosure system, consumer rights and interests protection mechanism, internal control mechanism, financial and accounting system, internal audit system, regular external audit system, and data management system. Governance system, through all-round and multi-level system construction to escort the continuous compliance and sound operation of auto finance companies.
3. Provisions related to operational areas
The Measures divide the scope of business of automobile finance companies into two categories, namely, basic business and authorized business.
In terms of the basic business, the Measures clarify that auto finance companies can conduct business in foreign currencies, expand the scope of shareholders’ deposits, remove restrictions on sale-and-leaseback business, include automotive add-ons in the scope of business, and prohibit the continuation of the business of equity investment in financial institutions. 1） The currency in which automobile finance companies conduct business has been changed from “RMB” to “local and foreign currencies”;2） The scope of deposit-taking by automobile finance companies has been broadened. On the one hand, the scope of sources of time deposits has been expanded from “overseas shareholders and their wholly-owned subsidiaries in China and domestic shareholders” under the original measures to “(all) shareholders and the parent companies and controlling subsidiaries of the group in which (all) shareholders are located” under the new measures, thus expanding the scope of time deposits and facilitating the introduction of overseas funds by automobile finance companies. On the other hand, the term requirement of “three months (or more)” for time deposits under the original measures has been abolished.3） Compared with the original measures which explicitly exclude the sale and leaseback business, the new measures allow automobile finance companies to carry out the financial leasing business in the sale and leaseback mode, i.e., they are allowed to provide loans to automobile after-sales service providers for inventory procurement, purchase of maintenance equipment, etc., and at the same time stipulate that the leaseback business must be based on the real trade background of the vehicles;4） In order to meet the market demand for high-quality development of the automobile industry, the new approach includes the financing of automobile add-ons, such as navigation equipment, exterior film, charging piles, batteries and other physical accessory equipment, as well as services related to the use of automobiles, such as extended vehicle warranty, vehicle insurance, vehicle software and other services, in the scope of the business, and will allow the customer to apply for financing of the add-ons individually after handling the financing of the automobile.5） Another important change in the business scope of auto finance companies in the Measure is reflected in the deletion of the original approach to the business scope of the “the company can be engaged in the auto finance business related to financial institutions equity investment business after approval”, that is, no longer allow auto finance companies to engage in the equity investment business.
Authorized business refers to a business that can be operated by eligible auto finance companies only after approval by the SAFSA and its excluded organizations. The Measures make it clear that eligible automobile finance companies may carry out the operation of issuance of capital instruments, asset securitization business, hedging business and other businesses after SAFSA’s approval.
In addition, to promote the automobile consumption of overseas consumers and promote Chinese automobile brands to go overseas, the Measures clarify that automobile finance companies are allowed to set up overseas subsidiaries upon approval.
4. Risk management and regulation
The Scheme has added some refinements to the regulatory requirements, which include: 1） It is clearly required that auto finance companies should establish management systems and risk monitoring mechanisms for comprehensive risk, compliance risk, credit risk, liquidity risk, operational risk, fraud risk, information technology risk and reputation risk that match their business scale and risk profile;2） A new regulatory indicator of “liquidity risk” has been added: automobile finance companies are required to comply with the requirement that “the liquidity ratio shall not be less than 50%”. Accordingly, the new measures require auto finance companies to conduct regular liquidity stress tests, formulate and improve liquidity risk contingency plans, and eliminate hidden liquidity risks in a timely manner;3） It is clear that the auto finance company shall implement a list system to manage the cooperative institutions, i.e., the various institutions that cooperate with the auto finance company in the areas of customer acquisition through marketing, co-financing and loan issuance, payment and settlement, risk sharing, information technology and overdue collection, etc., and shall establish the criteria for admission and withdrawal of the cooperative institutions, as well as the system of regular assessment during the cooperation period, so as to ensure that the cooperative institutions and the cooperative matters comply with laws, regulations and supervisory requirements.4） Addition of reporting requirements for major emergencies: Automobile finance companies are required to “take immediate emergency measures and report to the SAFSA in a timely manner when major risks and losses arise or may arise in the course of their operations”;5） Increasing regulatory means such as on-site inspection, extended investigation and tripartite talks: the SAFSA and its dispatching agencies, in accordance with the requirements of prudential supervision, have the right to conduct an on-site inspection of auto finance companies in accordance with relevant procedures and regulations, have the right to investigate units and individuals related to suspected illegal matters in accordance with the law, and may carry out information exchanges or tripartite talks with the auto finance companies and the external auditing institutions in order to discover and resolve relevant issues in a timely manner.
The Measures have been revised based on summarizing the development and regulatory practice of the auto finance company industry, and their introduction will help strengthen the regulation of auto finance companies, promote the high-quality development of the industry, and further enhance the quality and efficiency of services to the real economy.