December 01, 2009

Administrative Regulations on Credit Investigation (Draft for Comment)

Issuing Body: Legislative Affairs Office of the State Council
Issuing Date: October 13, 2009
Effective Date: N/A


Striving to fill a gap in the legal structure that underpins China's still-developing market economy, the Legislative Affairs Office of the State Council has released draft rules that would for the first time regulate the credit investigation industry nationwide. The draft Administrative Regulations on Credit Investigation (Credit Investigation Regulations), which were released for public comment on October 13, apply to agencies that collect, organize, store and/or report the credit information of both individuals and organizations. The rules also protect individual privacy by limiting the types of information credit investigation agencies can collect and store.

The Credit Investigation Regulations come more than two years after China's central government released a comprehensive blueprint for the country's credit system called Several Opinions on the Construction of a Social Credit System. That document, which was issued in March 2007, provided a basic framework for China's credit system and emphasized the importance of expediting its development. The blueprint called for:
  • Establishment of credit investigation organizations, including loan credit investigation organizations, nationwide
  • Improvement of credit records pertaining to loans, tax payments, contract performance and product quality
  • Development of the credit services market through support of credit services organizations and the gradual and steady opening of the domestic credit services market
  • Strengthening the regulation and supervision of the credit industry by establishing a comprehensive legal regime
When passed, the Credit Investigation Regulations will address this final mandate, regulating the activities of credit investigation organizations and protecting the legal rights and interests of both individuals and organizations that are monitored by credit investigation activities. As the first-ever legislation governing China's credit investigation industry, the Credit Investigation Regulations represent a milestone.

Definitions of Credit Investigation Services and Credit Investigation Organizations

As used in the Credit Investigation Regulations, credit investigation services include the acts of collecting, organizing, safekeeping and processing the credit information of individuals, businesses and other organizations. Such services also include the provision of credit reporting, credit rating and credit grading services to clients.

A credit investigation organization is a legally incorporated entity engaged in providing credit investigation services. Under the Credit Investigation Regulations, governmental agencies and judicial organizations may collect, organize, store and publish credit information in the course of their normal duties without being considered credit investigation services (and thus without being covered by these new regulations).

Supervisory and Regulatory Agency

The Credit Investigation Regulations designate the People's Bank of China (PBOC) as the regulatory agency responsible for supervision and oversight of credit investigation organizations and their business activities. The PBOC and its local counterparts are empowered to make on-site inspections as needed and take the following measures:
  • Enter the credit investigation organization for inspection.
  • Question the staff and request an explanation about the matters under investigation.
  • Review documents of the credit investigation organization related to the matters under inspection, and seal or otherwise protect documents that are considered at risk of being transferred, destroyed, hidden or falsified.
  • Inspect the computer system that is being used to manage business data.
Market Entry Requirements for Credit Investigation Services

Credit investigation organizations in China currently operate in a chaotic environment—with corresponding disorganization of credit investigation services. Accordingly, the draft Credit Investigation Regulations impose relatively stringent market entry threshold requirements for companies wanting to provide credit investigation services. An enterprise must satisfy all of the following requirements in order to establish a credit investigation organization:
  • Paid-in registered capital must be no less than RMB five million; organizations that want to provide credit reporting services as well as more basic collection and storage activities must have a paid-in registered capital of no less than RMB 50 million.
  • Have a complete organization and managerial system. Have qualified director(s), supervisor(s) and senior management.
  • Shareholder(s) and de facto controller(s) must meet certain requirements of the State Council's designated credit investigation regulator, the PBOC.
  • Have a sound data file management system, security measures and safety-protection measures.
  • Have a place of business and technical facilities.
  • Have a modern, advanced credit database system.
  • Other requirements as imposed by the PBOC.
The establishment of a credit investigation organization is subject to the prior approval of the PBOC. Only after obtaining a business permit from the PBOC may a credit investigation organization register with the State Administration for Industry and Commerce and secure a business license.

Material changes to a credit investigation organization, such as changes in its business scope, organization type, merger, acquisition or split, are also subject to prior approval of the PBOC. Changes to the name or registered capital of a credit investigation organization should be registered at the PBOC within 30 days after such changes occur.

The draft Credit Investigation Regulations remain silent on market entry thresholds for foreign investors and foreign-invested enterprises. In practice, some foreign-invested credit investigation organizations have already been active in China. According to public releases, for example, some foreign-invested credit investigation organizations have been providing credit investigation services in Shanghai. The government is expected to clarify the entry thresholds for foreign investors and foreign-invested enterprises.

General Rules for Credit Investigation Services

The draft Credit Investigation Regulations set forth basic rules for credit data collection and organization, as well as the provision and use of credit products:
  • In general, any credit investigation organization must first obtain an individual's consent before collecting or using his or her credit data.
  • A credit investigation organization must also get an individual's consent before reporting his credit data to a third party.
  • Credit investigation organizations need not get permission from an enterprise to collect its credit data, but consent is required before a credit investigation company can legally provide such credit data to a third party.
  • All activities, including data safekeeping, organization, processing and analysis, must be conducted within China.
  • A credit investigation organization cannot collect certain types of individual information, such as ethnic group, religion, party identity, blood type, disease, physical shape, genes, etc.
China Credit Reference Center

The PBOC has also established a separate entity, known as the China Credit Reference Center, which is responsible for the construction, operation and management of a basic unified national credit information database. The Credit Reference Center is entitled to collect the credit information of individuals, entities and other organizations from enterprises and public institutions but not from governmental agencies, judicial organs or financial institutions.

Upon approval of the subject, governmental agencies, judicial organs, enterprises, public institutions, other organizations and individuals may seek to review credit information held by the China Credit Reference Center.

Conclusion

As the first national legislation governing China's credit investigation industry, the draft Credit Investigation Regulations herald a new age of regulation of an industry that performs an important function in a modern market-oriented economy. Still, regulation of the credit industry remains in its infancy, so there is certainly a long way to go before a relatively comprehensive legal regime is well established.

A final version of the Credit Investigation Regulations is expected before the end of 2009.

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