Authored by Dr. Zhan Hao (firstname.lastname@example.org)
Recently, a series of regulatory exposure drafts on application of insurance funds have been made by CIRC. Rule 11 of Interim Measures on Insurance Funds Trusteeship (Exposure Draft) states, unless otherwise stipulated by CIRC, the following relationships must not exist between trustee and trustor, trustee and overseas escrow agent: (1) one party directly or indirectly holds over 10% stocks of the other party; (2) a third party holds over 10% stocks of the two parties respectively. CIRC has been adhered to its concept of regulation, prohibiting the above-mentioned two equity-relations between trustee and trustor to guarantee the trustor’s independence.
In Current China, regulations regarding insurance assets trusteeship have raised widespread concern. Financial institutions as insurance assets management companies and other non-insurance assets managements companies show a keen interest in the issue and a series of relevant discussions are aroused.
Generally, trusteeship refers to an intermediary service, that is, some professional institutions, such as commercial bank, act as a third party, in accordance with relevant laws, regulations and trusteeship contract, to undertake activities as accountant opening, custody of assets, settlement and delivery, assets estimate, accounting, investment supervision and etc, so as to protect the interests of the asset holders.
Application of insurance funds should follow principles of safety, profitability and mobility, of which safety is of primarily importance. This characteristic of insurance funds particularly requires the trustor should take responsibilities as supervision on legal application of insurance funds, timely risk-warning, delivery of data required for supervision and report to regulatory institution, collaboration with regulatory institution to regulate and inspect insurance companies on their investments, thus to avoid inappropriate use of insurance funds.
To ensure the trustor preforming its duty of supervision, China〔2005〕issued by CIRC) that insurance companies must, following regulations of CIRC, entrust a third party to custody assets of debenture independently. The subsequent Notification on Launch Of Insurance Funds Trusteeship (No.90〔2005〕issued by CIRC)makes independent trusteeship by a third party as one of the fundamental principles of insurance funds trusteeship.
InsuranceRegulatoryCommission (CIRC) emphasizes the independence of the trustor in some regulatory documents and puts forwards trusteeship of insurance funds should fall onto an independent third party. It has been early stipulated in Rule 6 of Interim Measures on Insurance Companies’ Debenture Investments and Managements (No.72)
However, CIRC has not in some relevant documents made a clear definition on a third party’s independent trusteeship. It is usually understood that a third party’s independent trusteeship refers to the trusteeship by a third party having no affiliate relationship with the trustee, which can be confirmed by regulations of Pilot Management Measures on Insurance Funds Indirect Investment on Infrastructures (Ordinance No.1〔2006〕issued by CIRC). Rule 51 of this measure provides the trustor should neither be the trustee, project stakeholder or the beneficiary nor have any affiliate relationship with any of them. To ensure the independence of the trustor, Rule 51 lays stress on non-affiliate relationship between trustor and trustee.
In terms of scope of affiliate relationship, Rule 6 of Interim Measures on Associated Transactions by Insurance Companies (No.24〔2007〕issued by CIRC) states affiliated parties of insurance companies are categorized as affiliated parties based on equity relationship, affiliated parties based on management relationship and other affiliated parties.
Rule 7 specifies affiliated parties based on equity relationship include (1) shareholders, chairmen of the board and general managers of insurance companies; (2) corporate bodies or other organisations directly, indirectly or jointly controlled by shareholders of insurance companies as well as chairmen of the board, general managers of the bodies or organisations; (3) dominant shareholders, chairmen of the board, general managers of insurance companies; (4) corporate bodies or other organisations directly, indirectly or jointly controlled by insurance companies as well as chairmen of the board, general managers of the bodies or organisations. The shareholders under this rule refer to those who directly, indirectly or jointly hold or control over 5% stocks or votes of insurance companies.
The affiliated parties based on management relationship under Rule 8 include: (1) directors, supervisor of insurance companies, and senior executives of head offices as well as their immediate relatives; (2) corporate bodies or other organisations directly, indirectly or jointly controlled or greatly influenced by directors, supervisor of insurance companies, and senior executives of head offices as well as their immediate relatives.
Other affiliated parties under Rule 9 of the Measure refer to natural men, corporate bodies or other organisations that are able to exert great influences on insurance companies or make transactions with insurance companies without following the third party’s independent pricing or charging standards on market, exclusive of the scope of affiliate relationship.
Based on the above-mentioned provisions of Interim Measures on Associated Transactions by Insurance Companies, there is a broad definition on affiliated relationship of insurance companies made by CIRC. If all the financial institutions relating insurance companies in the aforesaid ways are excluded of trustors, there would expose great restrictions on insurance companies seeking for trustors.
Avoidance of Negative Impact
To avoid such negative impact, CIRC regulations, while defining the trustor’s independence, do not exclude all the financial institutions relating insurance companies in the aforesaid ways but only exclude the financial institutions specially equity-affiliated to insurance companies.
E.g. Rule 12 of Guidance on Trusteeship of Insurance Companies’ Equity Portfolio (Trial) (No.16〔2005〕issued by CIRC) states a commercial bank, directly or indirectly holding over 10% stocks of an insurance company or any other professional financial institution, must not assume as trustor of the insurance company’ equity portfolio. Any insurance company directly or indirectly holding over 10% stocks of a commercial bank or any other financial institution must not entrust the bank or institution for equity portfolio trusteeship. As such, the guidance defines the trustor’s independence as its association of 10% stock equity with trustee. Affiliate relationship in Rule 94 of Pilot Management Measures on Insurance Funds Indirect Investment on Infrastructures is defined as follows：Affiliated parties have controlling relationships or are jointly controlled by the third party in terms of stocks and capital contribution.
The above rules, compared with other former ones regulating in a broad range, are more operable, but whether trustors’ independence can be substantively guaranteed remains to be seen.