As China continues to open its economy to the rest of the world, and there are an increasing number of economic and trade interactions between Chinese residents and overseas players, various kinds of cross-border activities emerge involving foreign financial products. Compared to mature markets, PRC laws and regulations governing the sales of cross-border financial products are yet to be comprehensive and detailed enough to be able to handle the complicated situations that arise in practice. Therefore, financial regulators have had to continue improving their regulation and enforcement practices to guide market behaviors and take swift action to prevent illegal activities from spreading.
After the China Insurance Regulatory Commission (“CIRC”) released the Risk Disclosure on the Purchase of Hong Kong Insurance Products by Mainland Residents in April 2016, on May 11, 2016, the CIRC issued the Notice on Strengthening Regulations on Illegal Sales Activities of Overseas Insurance Products (Bao Jian Shou Xian  46 Hao)(the “Notice”) to all local bureaus, and required local bureaus to take relevant enforcement actions with respect to those so called “resurgent” covert violations of the sale of overseas insurance products inside China. In fact, as far back as in 2004 and 2005, the CIRC had released notices addressing the illegal sale of “underground insurance policies,” explicitly defining the scope of illegal sale behaviors and the related targets of law enforcement. However, this Notice focuses on methods of covert illegal sales and determining whether domestic institutions or individuals have obtained illegal gains from overseas institutions.
Hazards of Illegal Sales Behavior
The Notice first points out that there are four hazards with respect to the illegal sale of overseas insurance products, i.e.: (i) disturbing domestic insurance market competition, (ii) disturbing the national foreign exchange administration order, (iii) leading domestic consumers to be misled and causing them to assume high costs for protection of their interest, and (iv) possibly allowing illegal outbound transfers and obfuscation of illegal properties involved therein.
Forms of Illegal Sales Activities
The Notice requires local bureaus to proactively enforce rules on two kinds of illegal promotional activities: first, domestic wealth management consultants, insurance agencies or similar intermediary institutions or individuals receiving benefit from overseas institutions while advertising and promoting their insurance products in product presentations, wealth management summits or money management knowledge lectures, etc., and secondly, these kinds of institutions or individuals receiving benefit while intending to arrange for potential purchasers, who are seeking to buy insurance products, to purchase those products abroad. These two activities constitute illegal sale of overseas insurance products by promotion and solicitation to facilitate a deal, and thus shall be banned and punished.
In addition to these two forms of illegal sale of overseas insurance products, the Notice not only requires the investigation and punishment of the activities of “signing (an insurance contract) and concluding (an insurance transaction) domestically,” but also requires special attention on the covert act of the sale of overseas insurance products by “introducing the insurance product domestically, signing (the insurance contract) and concluding (the insurance transaction) abroad.” The Notice additionally requires both the domestic insurance institutions and insurance industry practitioners organizing or assisting in the illegal sale of overseas insurance products to be punished, and the punishments include blacklisting the individuals, imposing administrative penalties, and pursuing liabilities against the primarily responsible persons of the relevant institutions.
Possible Enforcement Actions against Overseas Insurance Institutions
It is worth noting that the CIRC also requires the investigation of the status of all payments and benefits in whatever name received by domestic institutions or individuals for the illegal sale of overseas insurance products from overseas insurance institutions. If the CIRC identifies this kind of situation, it will determine whether such activity and circumstances constitute a de facto entrustment relationship between the overseas insurance institutions and the domestic institutions or individuals for the sale of overseas insurance products inside China, and will penalize such overseas insurance institutions “through the relevant channels” according to the law.
Given the comparable features of financial products, the Chinese financial regulators (including CSRC, CIRC or CBRC) may take the same or similar views in terms of the promotion of foreign financial products to the extent that such promotional activities are extended to the jurisdiction of China, and may take law enforcement action accordingly. This also indicates that the compliance of cross-border promotion and sales of overseas financial products is likely to be one of the priorities of law enforcement for China’s financial regulators in the next stages.