China’s banking regulator has rung the alarm about corporate governance problems with a slew of non-bank financial institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) announced that it recently undertook a specialist investigation into the corporate governance conditions of four types of non-bank financial institutions in China, including financial leasing companies, corporate group finance companies, automobile finance companies and consumer finance companies.
CBIRC identified four major problems with the corporate governance of these four types of financial institutions in China, including:
- Imprudent and non-compliant conduct on the part of shareholders. The equity structures of non-bank financial institutions are highly concentrated, enabling some shareholders to abuse their positions and illegally interfere in the operation of organisations, damaging their legal person independence and becoming sources or exacerbators of risk. “Some shareholders have attempted to conceal the true source of funds, and after transferring bank loans through affiliates multiple times, use funds which aren’t their own to invest in the equity of non-bank financial institutions.”
- The effectiveness of directors, supervisors and senior executives in performing their duties requires upgrade. CBIRC said that some non-bank financial institutions have few directors or no independent directors, while the independence and professionalism of specialist committees is inadequate. Supervisors are of variable quality, and do not adequately perform their assessment duties.
- Insufficient regulation of affiliate transactions. CBIRC said that lack of strict recognition of affiliates and affiliate transaction is a “comprehensive problem awaiting improvement,” and that there is still problem with failure to review and approve affiliate transactions. Over the past several years there have been cases where shareholders lacking funds have ordered staff to undertake affiliate transactions via covert means, in order to dodge regulatory curbs.
- Incentive and restraint mechanisms must place greater emphasis upon risk. CBIRC found that the performance assessments of certain institutions gave low weightings to risk and compliance factors, and emphasised incentives excessively without sufficient restraints.
The announcement follows the release of an assessment by CBIRC which found mixed corporate governance levels amongst China’s banking and insurance sector financial institutions.