Regulatory Crackdown: Financial Institutions Face Compliance Challenge

Financial regulation takes a heavy blow, and financial institutions' compliance management is about to undergo a comprehensive upgrade. In active response to the spirit of the central financial work conference, to further enhance the ability of China's financial institutions to operate in accordance with the law and regulations, and to cultivate a unique Chinese financial culture.

It has clarified the three lines of defense compliance management framework that financial institutions must build, and also advocates and encourages financial institutions to establish the positions of Chief Compliance Officer (CCO) and Compliance Officer to strengthen the professionalism and independence of compliance management. At the same time, it also emphasizes the core responsibility of senior management in compliance management, aiming to deeply root the concept of compliance in the corporate culture of financial institutions, making it the cornerstone of the institution's compliant operations.

Industry analysis believes that it is not only a comprehensive upgrade of the current financial regulatory requirements but also a sign that China's financial compliance management system has reached a new level. By implementing this all-round and multi-level compliance management system, the risk prevention and control capabilities and the level of legal and compliant operations of financial institutions will be significantly improved, laying a solid foundation for the stable development of the financial market.

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"Chief Compliance Officer" is about to make an appearance.

Improve the financial regulatory system, legally include all financial activities in the supervision, strengthen regulatory responsibilities and accountability systems, and enhance the coordination of central and local supervision.

Deepen the reform of the financial system, build a modern central bank system, strengthen and improve modern financial supervision, strengthen the financial stability guarantee system, legally include all types of financial activities in the supervision, and maintain the bottom line of not occurring systemic risks.

It has clarified the responsibilities of the board of directors and senior management, the establishment and responsibilities of the Chief Compliance Officer and Compliance Officer, as well as the responsibilities and division of labor of the compliance department. Financial institutions are required to set up a Chief Compliance Officer at the headquarters and a Compliance Officer at provincial (separately listed cities) branches or first-level branches. Fully leverage the core functions of the Chief Compliance Officer and Compliance Officer in the compliance management system, which are to transmit up and down, coordinate left and right, and communicate inside and outside, to promote compliance management work in a coordinated manner. Strengthen the main responsibility of the business line, the management responsibility of the compliance department, and the supervisory responsibility of internal audit, to achieve organic coordination and effective connection.

Improve the corresponding safeguard measures for the performance of duties by the Chief Compliance Officer, Compliance Officer, compliance department, and personnel. Financial institutions are required to equip the compliance department with sufficient and professional compliance management personnel, and enhance the effectiveness of compliance management through the professionalism of compliance personnel. Clarify the rights to attend meetings, be informed, investigate, inquire, make suggestions, and issue early warnings of the Chief Compliance Officer and Compliance Officer.

For financial institutions and their staff, especially for directors, senior management, Chief Compliance Officers, and Compliance Officers who fail to effectively implement compliance management, illegal and irregular behaviors will be seriously held accountable and the punishment will be increased.

"Chief Compliance Officer" is one of the highlights. Articles 11 and 12 show that financial institutions should establish a Chief Compliance Officer at the institution's headquarters. The Chief Compliance Officer is a senior management personnel, directly led by the institution's chairman and president (general manager), and is responsible to the board of directors; financial institutions can establish a Chief Compliance Officer and Compliance Officer separately according to their own business situation, or they can be concurrently held by the person in charge of the financial institution, provincial (separately listed cities) branches, or first-level branches. If held concurrently by the president or general manager of the financial institution, it is not subject to the job conditions of the Chief Compliance Officer or Compliance Officer stipulated in these regulations, and does not need to obtain the appointment qualification permit from the State Financial Supervision and Administration Bureau or its dispatched institutions.Industry analysis suggests that the establishment of the "Chief Compliance Officer" (CCO) highlights the central role of compliance management in the operations of financial institutions, which helps to strengthen the independence and authority of the compliance function. At the same time, clarifying the direct responsibility of senior management for compliance management and integrating compliance into the construction of the organizational culture will encourage financial institutions to foster a strong compliance atmosphere from within, ensuring that the concept of compliance is deeply ingrained.

Lou Feipeng, a researcher at Postal Savings Bank of China (601658.SH), stated: "The separate establishment of a Chief Compliance Officer helps financial institutions to have a dedicated person responsible for compliance management, better ensuring that compliance work is effectively implemented and achieves the desired results."

However, some industry insiders have raised concerns about the actual effectiveness of establishing a Chief Compliance Officer. For instance, Dong Ximiao, the Chief Researcher at China United Financial, remarked: "If the Chief Compliance Officer is merely a title and not a member of the Party Committee, it would be difficult for them to play an effective role. The separate establishment might actually weaken compliance management; issues such as whether there is a role overlap between the Chief Compliance Officer and the Chief Risk Officer, and how to divide responsibilities internally, need further consideration."

The Three Lines of Defense Form a Joint Force in Compliance Management

Compliance management is an essential part of the high-quality development of financial institutions. Dong Ximiao analyzed for the reporter: "It is timely and necessary to have comprehensive and systematic regulations on the compliance management of financial institutions, including very specific requirements. This helps to enhance the compliance awareness of financial institutions and promote more compliant management and operational behaviors. This is both a need to better serve the real economy and a need to better prevent and resolve financial risks."

Lou Feipeng believes that at this stage, it is significant for regulatory authorities to draft policies related to compliance management. "When financial institutions face significant operational pressures, the business and functional departments have substantial operational assessment pressures, which may lead to a weakened focus on compliance work. They may also lack effective compliance management tools and methods, requiring the compliance department to provide more professional and effective support."

"Financial institutions, especially banking institutions, deal with currency and credit operations that are closely related to public interests, such as banks being the core of the modern economy, commercial banks accepting public deposits, and extending loans to businesses and individuals. The special nature of financial institutions determines that their compliance management requirements are higher than those of general enterprises," Dong Ximiao stated. "Financial institutions must adhere to compliant operations, cultivate a compliance culture, guide employees to enhance their compliance awareness, and continuously improve their level of compliance management. Only in this way can they better protect the legitimate rights and interests of financial consumers, shareholders, clients, employees, and other stakeholders."

To further enhance the risk prevention and control capabilities of financial institutions and promote the healthy and stable development of the financial market, it is clear that financial institutions should establish a compliance management framework with three lines of defense, ensuring that each line performs its duties, coordinates, and cooperates effectively to fulfill compliance management responsibilities and form a joint force in compliance management. Specifically, this includes:

1. The various business and functional departments, as well as subordinate institutions of financial institutions, fulfill the first line of defense responsibilities in compliance management, bearing the main responsibility for compliance. They should actively carry out daily compliance control, be responsible for the strict enforcement and effective implementation of compliance standards within their respective lines and fields, and actively cooperate with the compliance management department.

2. The compliance management department of financial institutions fulfills the second line of defense responsibilities in compliance management, bearing the management responsibility for compliance. They should provide compliance support to the management of various departments and subordinate institutions within the organization, organize, coordinate, and promote compliance management work across departments and subordinate institutions.The internal audit departments of financial institutions fulfill the responsibilities of the third line of defense in compliance management, undertake the supervisory responsibility for compliance, and should audit the compliance of the institution's business management, and establish an effective information exchange mechanism with the compliance management department.

The regulation on the three lines of defense compliance management framework is a significant innovation in China's financial compliance management system. It not only clarifies the responsibilities and positioning of each line of defense but also emphasizes their coordination, cooperation, and mutual support. The industry generally believes that this measure will strongly promote the improvement of financial institutions' compliance management level, laying a solid foundation for the stable operation of the financial market and the sustainable development of financial institutions.

Lou Feipeng analyzed to the reporter: "The three lines of defense fully exert the joint efforts of business and functional departments, compliance management departments, and audit departments to carry out full-process and full-chain compliance management for business operations. In terms of specific cooperation, business and functional departments guard the first line of defense under the guidance of the compliance management department, the compliance management department supports business and functional departments and guards the second line of defense, and the audit department fully exerts its audit supervision function to guard the third line of defense."

By constructing a scientific, advanced, comprehensive, clear in rights and responsibilities, independent, authoritative, and pragmatic and efficient compliance management system, the risk prevention and control capabilities and the level of legal and compliant operations of financial institutions will be significantly improved. Currently, it is in the stage of soliciting opinions, and it is planned to be implemented from March 1, 2025. At the same time, a one-year transition period will be set, requiring financial institutions to complete rectification during the transition period.