Administrative Regulations on Credit Investigation (Draft for Comment)

Issuing Body: Legislative Affairs Office of the State Council
Issuing Date: July 21, 2011

Nearly two years after it first issued the Administrative Regulations on Credit Investigation ("First Draft Credit Regulations") in draft form—and after extensive negotiations with certain enterprises, experts, and credit investigation organizations—the Legislative Affairs Office of the State Council has released a second version of the rules, still in draft form ("Second Draft Credit Regulations"). This new draft leaves intact the basic framework of the first draft for regulating credit investigation services that collect, organize, store, and process the credit information of individuals, with the primary aim of protecting privacy. But the Second Draft Credit Regulations make several key changes. Most notably, they do not apply to credit rating and grading services, and they are considerably looser in their regulation of information-gathering about businesses as opposed to individuals. Issued on July 21, 2011, the Second Draft Credit Regulations were open for public comment until August 22.

China Law Update summarized the First Draft Credit Regulations in our December 2009 issue. As we noted then, the rules were issued in response to a mandate from the central government, which in March 2007 issued a comprehensive blueprint for China's credit system (Several Opinions on the Construction of a Social Credit System). That document provided a basic framework for China's credit system and emphasized the importance of expediting its development. It called for the establishment of credit investigation organizations, including loan credit investigation organizations, nationwide; for the improvement of credit records pertaining to loans, tax payments, contract performance and product quality; for development of the credit services market through support of credit service organizations and the opening of the domestic credit services market; and for strengthening the regulation and supervision of the credit industry by establishing a comprehensive legal regime.

Application of the Regulations

As drafted in 2009, the First Draft Credit Regulations applied to credit investigation services that collect, organize, store, and process the credit information of individuals, businesses, and other organizations. Regulated services included those that provide credit reporting, credit rating, and credit grading. Recognizing that credit rating and credit grading services are different from general credit investigation activities, the Second Draft Credit Regulations no longer apply to credit rating and grading services. Separate rules governing credit rating and grading services are expected in the future.

Different Treatment of Credit Investigations of Individuals and Companies

The general view of public comments on the First Draft Credit Regulations was that credit investigations of individuals should differ substantially from investigations of companies, particularly in relation to the protection of personal information and privacy. The Second Draft Credit Regulations treat these activities differently and provide different standards for the two kinds of activities.

One result is that the second draft of the credit rules focuses more heavily on the protection of personal information and privacy than on developing China's credit investigation industry. The new draft sets forth specific requirements for the establishment and approval of a credit investigation organization that processes personal information.

According to the Second Draft Credit Regulations, the establishment of, and any major changes to, a personal credit investigation enterprise are subject to prior approval by the national credit investigation authority, the People's Bank of China (PBOC). Major changes that must get PBOC approval include name changes, the establishment of branches and subsidiaries, consolidations or divisions, changes of registered capital, any changes of a director, supervisor, or senior management personnel, and any change of a shareholder that contributes 5 percent or more registered capital or holds 5 percent or more equity shares.

In addition, an enterprise must satisfy all of the following requirements in order to engage in credit investigation business involving individuals, including the gathering, storage, and dissemination of the personal information of individuals:

• Paid-in registered capital must be no less than RMB50 million, and it must be contributed in one lump sum.
• The main shareholder or shareholders must enjoy a good reputation and must have no record of violation of any laws or regulations within the preceding three years.
• The enterprise must have a sound facility, equipment, systems, and measures to safeguard information.
• It must have qualified directors, supervisors, and senior management personnel.
• Other requirements may also be applicable as imposed by the PBOC.

Most restrictions on personal credit investigation remain unchanged from the First Draft Credit Regulations. For example, prior consent must be obtained from the person whose information is to be collected; and certain private information, such as genes, blood type, and religious beliefs, may not be collected.

However, the collection, provision, and usage of information about businesses is subject to less stringent regulation in the Second Draft Credit Regulations in the following respects:

• Enterprises that engage in credit investigations of businesses are not subject to any prior government approval.
• There is no specific requirement for registered capital, meaning an enterprise could theoretically be established with capital of as little as RMB30,000, the minimum requirement for general companies, as of January 1, 2006, set forth in the Company Law of the People's Republic of China.
• In contrast to personal credit investigation activities, credit investigation organizations are generally permitted to collect and process all sorts of information about enterprises, unless otherwise prohibited by laws and regulations (for example, trade secrets).
• Credit investigation organizations are expressly permitted to obtain information from an enterprise, transaction counterparties, public government sources, court judgments, and court verdicts.

National Financial Credit Information Database

The Second Draft Credit Regulations provide a framework for the establishment, function, and business scope of the National Financial Credit Information Database, a database to be established, operated, and maintained by a professional organization under the supervision of the PBOC. The National Financial Credit Information Database will obtain information reported by financial institutions that engage in credit and loan business in accordance with law and provide data services to any credit investigation organization, information owners, and information users with proper authorization. It will charge service fees on a cost basis.

Conclusion

When finally enacted, these credit regulations will fill a gap in the legal structure that underpins China's still-developing market economy. Striving to balance the need for privacy and the protection of personal information with the needs of a market economy, the Second Draft Credit Regulations make important distinctions between personal and business credit investigations. As it is unusual for rules to go through a third round of public comments, an official launching of these new regulations is expected soon.