“In the context of the establishment of the basic model framework, should we move towards mixed industry supervision? In the past, it was dominated by separate industry operation and separate industry supervision, and there were also some mixed operations therein. For example, the operation of some financial holding companies, including the institutions that have already been approved in the system and newly emerged Internet enterprises trying to become fully licensed financial holding companies. Financial mixed operation is also a development trend in the international and domestic markets. But I prefer to emphasise that in the future, the financial supervision system should not be mixed supervision, but full coverage supervision”, He Haifeng told Guozice of finance.ifeng.com.

He Haifeng stressed that full coverage supervision is not simply mixed supervision. The characteristic direction is embodied in three specific aspects: responsibilities of central and local authorities, strengthening comprehensive supervision, and emphasising functional and behavioral supervision.

The responsibilities of central and local authorities should be shifted from institutional supervision to institutional and functional supervision

Guozice: Now the preliminary model of financial supervision system reform has been put into practice, and under the overall planning and coordination of the Financial Stability and Development Committee (FSDC), a new model of “one bank and two commissions” has been adopted. So far, only one plenary meeting has been held by the FSDC, how will this organ for deliberation and coordination implement and refine the work in the future?

He Haifeng: The report of the 19th CPC National Congress proposed the establishment of a modern financial system. The establishment of the modern financial system requires the establishment of a modern financial supervision system that matches the modern financial system. To understand the current reform of the regulatory system, we should first understand the several stages of financial supervision:

In the first stage, China’s first National Conference on Financial Work was held in 1997, and the Central Financial Work Commission was set up in 1998. This can be seen as the first stage of financial supervision, followed by the gradual formation of the “one bank and three commissions” supervision system.

In the second stage, the China Securities Regulatory Commission (CSRC) was first established, followed by the China Insurance Regulatory Commission (CIRC) and the China Banking Regulatory Commission (CBRC). During this period, some cross-sector businesses need to strengthen supervision and coordination, so in 2013, the system of an inter-ministry co-presence conference for financial supervision coordination was established, which can be seen as the second stage.

In the third stage, the fifth National Conference on Financial Work, held in 2017, decided to set up the Financial Stability and Development Committee under the State Council, which has unfolded a new stage in the reform of the financial regulatory system.

The Financial Stability and Development Committee (FSDC) under the State Council is a qualitative deliberative body. The key now is how to implement the working mechanism of the deliberative body so that the work in the new stage of supervision can be truly carried out. In my opinion, there are three levels of responsibility to be taken into account: at the first level, the FSDC under the State Council has identified five responsibilities when it was established, which includes implementing the decisions and arrangements of the CPC Central Committee and the State Council on financial work, deliberating on major plans for the reform and development of the financial sector, conducting overall planning of financial reform, development and supervision, coordinating the matters related to monetary policy and financial supervision, responding well to international financial risks, and guiding the reform, development and regulation of local finance. At the second level, the FSDC under the State Council has set up an office at the central bank, which has strengthened the central bank's position. Eventually, the FSDC under the State Council may consist of 8 to 10 ministries and commissions, however, economic management departments are still dominated by the central bank's office and “one bank and two commissions”. If we say that the supervisory system of “one bank and three commissions” is an old framework, emphasizing separate operation and separate supervision, now the office is set up at the central bank, emphasizing the shift from institutional supervision to laying equal emphasis on institutional supervision and functional supervision. At the third level, local governments and local financial authorities are given corresponding responsibilities. The support of finance to economic development and the serving of finance to the real economy has to be specific to each region, all regions want to give priority to the development of the financial industry in their economic development and support the development of their economy through the development of the financial industry. But this could lead to some cross-border behavior. Local authorities may interfere in the operation of finance or only pursue the development of finance, thus leading to financial chaos. At the same time, the responsibility of financial supervision in the jurisdiction has been sidelined. Therefore, local authorities emphasize that financial authority lies with the central government, yet the supervision responsibility of local authorities is also very important. The problem now is that at the local and central regulatory levels, there is an additional top-level arrangement by the FSDC under the State Council, however, the channel between the FSDC under the State Council and local authorities has not been fully linked. That is, the office at the People's Bank of China and local FSDCs need to establish a channel; only in this way can responsibilities at all levels be brought into play. Why do we need to link the responsibility mechanism of the central and local authorities? To develop finance, it is not enough to rely solely on the central government. Only by arousing the enthusiasm of the local governments and endowing them with supervisory responsibility can we effectively realize inclusive finance, let finance return to the role of the service entity, and provide better financial services for local economic development.

Regulation may move towards full coverage regulation in the future

Guozice: Do you think that financial supervision will move towards mixed supervision in the future?

He Haifeng: In the context of the establishment of the basic model framework, should we move towards mixed industry supervision? In the past, it was dominated by separate industry operation and separate industry supervision, and there were also some mixed operations therein. For example, the operation of some financial holding companies, including the institutions that have already been approved in the system and newly emerged Internet enterprises trying to become fully licensed financial holding companies. Financial mixed operation is also a development trend internationally and domestically. But I would prefer to stress that in the future, the financial supervision system should not be mixed supervision, but full coverage supervision.

Why is it called “full coverage supervision”? Mixed regulation emphasizes the concept of business type, while full coverage regulation refers to the regulation of financial risks that may be brought by cross-industry, institutions, operations, and activities. In my opinion, future regulation should place more emphasis on the characteristics of full coverage regulation. So, how to reflect the characteristics of full coverage regulation? In addition to the FSDC under the State Council and the corresponding local offices, there are two other aspects to link the responsibility mechanism of the central and local authorities through the office at the central bank. First, strengthening comprehensive supervision rather than simply industry dialogue; second, shifting from institutional supervision to laying equal stress on institutional and functional supervision, with more emphasis on functional and behavioral supervision.

Guozice: How should functional and behavioral supervision be conducted?

He Haifeng: We can learn from the development and supervision of American finance. In the 1990s, the United States found its international competitiveness in finance declined, mainly because of the two big financial explosions in Britain since Margaret Thatcher’s appointment, that is, financial deregulation. As a result, Britain's financial competitiveness represented by the London International Financial Center improved. So when Clinton took office, he said no, we had to run a mixed operation. In 1999, the Clinton administration enacted a federal bill focusing on mixed operations of finance industry, namely, the Financial Services Modernization Act. The theme of Chapter 2 of the Financial Services Modernization Act is about financial supervision, emphasizing that mixed operation must be accompanied by corresponding regulatory support, so the title of the Chapter 2 is “Functional Supervision”. At present, China's financial development itself also has objective laws and the characteristics of Chinese practice. While stressing the division of labor and coordination of responsibilities between central and local authorities, and strengthening comprehensive and coordinated supervision, we should place more emphasis on functional and behavioral supervision. This is a response to the return of finance to its source, to its essence, and to serve the real economy.

Full coverage regulation is not simply mixed supervision. The characteristic direction is embodied in three specific aspects: responsibilities of central and local financial authorities, strengthening comprehensive supervision, emphasizing on functional and behavioral supervision.

Defining Functions is the Core and Difficulty of the “Three-Determination Scheme”

Guozice: Some analysts believe that after the “Three-Determination Scheme”, the work of China Banking Regulatory Commission in the future will be carried out around functional supervision. What do you think? How can the supervision of Internet finance be implemented in specific sectors?

He Haifeng: After the “Three-Determination Scheme”, the financial work of China Banking and Insurance Regulatory Commission in the future should be carried out around functional supervision. Why merge CBRC and CIRC? This actually reflects the idea of functional supervision, because functional supervision emphasizes that function is more important than form, and essence is more important than form. Of course, institutions such as banks and insurance companies, more importantly, are long-term subject to the conversion of saving and investment functions for economic development. Therefore, in the future, China Banking and Insurance Regulatory Commission should consider three aspects around functional supervision:

First, we emphasize the establishment of a modern financial institution system. However, the transition from institutional supervision to functional supervision cannot be accomplished overnight. The financial system is still dominated by economic and financial services, the most important of which are banks and insurance institutions. How to make banks and insurance institutions modern financial institutions? First, banks and insurance should improve the modern financial enterprise system as soon as possible, including qualified shareholders, equity relations, investment transparency, and so on. Second is the establishment of modern management systems.

Second, indirect finance dominated by banks and insurance institutions in the past laid more emphasis on large and medium-sized institutions. Now, we should develop small & medium-sized private institutions or enterprises as soon as possible. Why? This is to achieve inclusive finance and serve small & medium-sized enterprises, as well as agriculture, rural areas, and rural residents, etc. In addition, there is a lot of chaos in the banking and insurance markets, such as the chaos brought about by financial innovation, shadow banking, and financial holding companies. Therefore, functional supervision emphasizes market unity, professionalism, and penetration.

Third, the strategic goal of financial opening is to establish an open financial system, including two-way openness. There are two aspects under open conditions: first, adapt to the regulatory mechanism under the influence of two-way intertwining of both internal and external markets under open conditions as soon as possible, therefore, the working methods should be updated and modernized. In addition, China's financial market supervision must coordinate and cooperate with international supervision. Especially under the impact of the financial crisis, countries should communicate and coordinate with each other. The supervision of financial function under open conditions also lays the foundation for our future participation in global financial governance.

Guozice: The "Three-Determination Scheme” was introduced after the merger of CBRC and CIRC. In your opinion, what are the difficulties in advancing the “Three-Determination Scheme”?

He Haifeng: the Three-Determination Scheme includes the establishment of agency departments, staffing and function deployment. In my opinion, function deployment is very important. Why? Because of some risks in financial activities in China's financial industry, especially with the development of some Internet information technologies, there will be a lot of sudden and rapid risks, which is a great test of the function. In the past, banks and insurance institutions were separate, with relatively clear functions, but there might be intersections between them. So supervision can neither be repeated nor blank and it should not cause waste of supervision, nor should there be regulatory loopholes and financial arbitrage. So, I think the difficulty lies in the determination of functions and responsibilities. As for posts, personnel deployment, and institutions, they should not be difficult to determine.

Function is the orientation around the whole regulatory reform. It is a big prerequisite when shifting from institutional supervision to functional supervision. Specifically, we may learn from the regulatory programs of the United States, Australia and the United Kingdom.

(The author He Haifeng is a postgraduate supervisor of Shanghai Academy)