Nowadays, banks are facing great challenges. China's economy will grow at medium-high speed rather than extremely high speed; the financial supervision is constantly intensified, so is the pressure from public opinions. Banks are facing great pressure from transformation. Under the new circumstance, compliance risks take new forms and contents different from traditional risks.
In recent years, our banking and financial institutions, under the leadership of CPC with President Xi Jinping as the core and closely following the decisions and layout made by the central party and the State Council, earnestly execute and implement the supervisory guidelines to made contributions required for stabilizing growth, promoting reform, adjusting structure, benefiting citizens and preventing risks. The fourth plenary session of the 18th CPC central committee passed the CPC Central Committee's Decision on Several Major Issues of Fully Promoting Law-based Governance, which ushered us into a new era of China’s legal construction. The 2017 Central Economic Working Conference clearly indicates that the prevention and control of financial risks should be placed at a more important position. In particular, the President Xi Jinping put forward important instructions on maintaining national financial security in the group learning session of the Political Bureau of the CPC Central Committee held recently. Learning from the development history of global banks, all long-lasting and sustainably growing banks root their existence on compliance. Under the economic New Normal, commercial banks encounter an urgent and realistic challenge of how to operate in a compliant way, how to serve the entity economy, serve clients and deal with the relationship among business development, compliant operation and risk prevention.
Hold fast to the original purpose to operate in a compliant way
Legal and complaint operation is a must for commercial banks to implement the law-based governance strategy of the central party committee. Fully facilitating law-based governance is a major strategic mission given by the central party committee in order to insist on and develop the socialism with Chinese characteristics and to better govern the nation and handle political affairs. President Xi emphasized that, “the key of ruling a country and a society lies on obeying rules”, “law-based governance is just nonsense if not actually implemented and legal provisions are nothing but paper if they are not effectively executed”. For commercial banks, legal and compliant operation is an act of implementing the law-based governance strategy. As an important subject in the market economy, commercial banks have to firmly establish the concept of legal operation and compliant operation to create value; voluntarily obey all rules and regulations; safeguard the authority of law; root their operation and management deeply in financial laws and supervisory regulations; enhance the enforceability of rules. These are embodiment of the law-based governance strategy in the banking industry.
Legal and complaint operation is a must for commercial banks to deepen the reform and serve the entity economy as required by the State Council. For a period of time, under the influence of some periodic and structural factors, the domestic economy is facing downturn pressure. Some enterprises are struggling in operation and debt risks keep emerging. In such case, the State Council has repeatedly emphasized that the banking industry should focus on the general situation and keep increasing the quality and efficiency of financial services provided for the entity economy. The state has promulgated many policies and measures to deepen the reform, release corporate burdens and energize the entity economy, including streamlining administration and institute decentralization, tax abatement and surrendering profit, regulating service charges of commercial banks and etc, so as to address the issues of “difficult and expensive financing” for enterprises. The 2017 Central Economic Working Conference indicates that we should keep facilitating the removal of production capacity, inventory and leverage, the reduction of cost and the improvement of weak links. In the financial field, as the main channel of financial resource allocation, commercial banks shall highly stress on and firmly implement the important layout of the State Council in deepening the reform and serving the entity economy; follow the leadership of compliant operation; stick to the position of banks as the intermediary agency of financial service value; insist in returning to the origin of finance to focus on the main business and lay down the weight, so as to ensure the effective implementation of all measures designed to serve the entity economy.
Legal and compliant operation is a must for commercial banks to regulate financial orders and prevent systematic financial risks as required by the CBRC. For long, the supervising authority has attached great importance and stressed that commercial banks should have compliant operation and stable development. Banking and financial institutions should be aware of their responsibilities and missions as well as the dangerous consequence of illegal actions. They should pay more attention to intensify their legal awareness. Moreover, CBRC continuously intensifies supervision, inspection and administrative punishment to lead and force commercial banks to operate compliantly. In 2015, CBRC organized “Two Intensifications and Two Containments” and the “Looking Back” examinations for three times. In 2017, it reopened the “Year of Enhanced Monitoring” and will organize special harnessing actions against credit risks, the risks in the board of directors, the board of supervisors and the management, the “Three Violations”, the “Three Interest Arbitrages”, the “Four Improperness” and the “chaos in banking market”. CBRC has issued an array of guiding opinions for enhancing the quality and efficiency of banking services for the entity economy, which shows the determination of the supervising authority in harnessing financial chaos and putting an end to violating actions. Commercial banks shall stick close to the supervising directions; take the opportunity of implementing supervisory guidelines to accelerate the business and structure transformation; hold the bottom line that systematic risks are never allowed to happen; put the awareness of compliance at the first place any time; regard compliance important values that are remembered in mind and executed by actions, so as to actually forbid any acts of noncompliance.
Legal and complaint operation is a must for commercial banks to maintain sustainable development. Strengthening compliance management underpins the healthy and sustainable development of the banking industry and guarantees the profitability of banks. Compliance management is not only an internal work but also the center of value. Fine compliance management can not only generate profits, but also effectively reduce the cost of violations, thus forming the core competitiveness. Meanwhile, the construction of a compliance management system integrates and optimizes the business and management flow and is a process of strengthening company governance and cultivating great corporate culture. In short, the intensification of compliant operation is facilitative for commercial banks to promote professionalism and operation efficiency, effectively attract and retain clients, increase their brand value, increase their tangible and intangible assets, avoid compliance risks and maintain the sustainable development of business.
Actively confront ourselves with the new circumstance and voluntarily change with the New Normal
Nowadays, banks are facing great challenges. China's economy will grow at medium-high speed rather than extremely high speed; the financial supervision is constantly intensified, so is the pressure from public opinions. Banks are facing great pressure from transformation. Under the new circumstance, compliance risks take new forms and contents different from traditional risks.
Firstly, the macro situation and financial risks are more complicated, bringing new risks to the banking industry. The first challenge is non-performing assets. Affected by the periodic economic adjustment and the unstoppable downturn, structural contradictions are more prominent. With the ongoing implementation of the removal of production capacity, inventory and leverage and more "zombie enterprises" are eliminated, some industries and enterprises face great pressure or dilemma of development. Dotted risks in over-capacity industries, local governmental debts and real estate may spread out and bring rigid challenges to the credit risk control of banks. The control pressure on NPA is increasing.
The second challenge is more and more financial risk emergencies. Shadow banks, illegal fund-raising, various trading platform and Internet finance as well as other risks in the financial sector are gradually showing up. Financial innovation intensifies the adding-up of leverage risks and cross risk infection. More and more financial risk emergencies are emerging and some banking and financial institutions are involved due to their business relationship or illegal involvement of employees. These emergencies damage the reputation and even cause unexpected mass incidents. When the economy is going upward, many incidents will be covered or ignored. But they are easily exposed in an economic downturn, and risks are easily amplified, bringing great pressure to banks in terms of accident control and compliance management.
The third challenge is the diversified fraud risks. As the economy develops, the operation scale and trading scope of banks are also expanding, resulting in increasing forms of crime. Meanwhile, the market order in an economic downturn will be damaged to a certain extent and speculations are spreading, which aggravates the transfer of external risks into banks to a certain extent. Banks may encounter notes frauds, malicious avoidance of debt or being vulnerable to "shadow banks" that look legal from the outside. Malicious transferring risks to banks are more and more violent, bringing new challenges to banks to stop risk infection.
The fourth challenge is more and more difficult internal control and incident prevention. Affected by unhealthy social currents and tempted by giant benefits, many major risk incidents and cases in the banking industry have happened from time to time during these two years. Some banking employees use banking resources to act as the fund broker, provide illegal guarantee, conduct illegal fund-raising, grant loans illegally and take private orders. Their tricks are more and more covert and difficult to monitor. The media pressure in the era of new media also exacerbates the reputation risks of banks, requiring banks to strengthen the internal control and incident management.
Secondly, banks are at the stage of transformation and development where they may be confronted with many new situations and features. Recently, the development of finance has witnessed a giant change of deepened marketization. Affected by the economic New Normal, interest rate liberalization, disintermediation, pouring-in of market competitors and wide application of new technologies, banks are confronted with market competition that is wider, more flexible and bloodier. Traditional deposit and loan business is limited; interest spread is shrinking; the profit growth and scale is declining. For Industrial Bank (IB), we have to change the previous mindset of "soaring development by occupying territories". Instead we should "stabilize development, protect security, promote transformation and consolidate foundations" in the next couple of years.
The first is to change the wrong mindset. We should correct our operation thinking and make "two changes" to our mindset: change the wrong development mode that focuses on scale expansion but ignores the operation and management of compliance culture; change the wrong mindset that internal control is just the responsibility of the legal compliance department and auditing department. Requirements on internal control are implemented on all employees throughout the process.
The second is to understand policies and abide by rules. We should deeply and accurately understand all major decisions and layout made by the central government, especially the structural reform of supply side; listen to the instructions of the party, follow its leadership and obey the rules. We should, on one hand, be brave and skillful enough to use innovative means and tools and accurately, effectively serve and drive the structural reform of supply side, and, on the other hand, be compliant enough with rules to avoid misconducts. We should accurately understand and strictly implement various financial supervisory requirements, voluntarily safeguard the financial situation and the general situation. In terms of execution, our business transformation is directed towards the aspects that are promoted and encouraged by the central government, especial those in line with the transformation direction of the economy and society and with the upgrade direction of industries and livelihood consumptions. On the contrary, we should firmly abandon and object to those aspects that are inconsistent with the central teachings, such as "promoting virtual economy and abandoning entity economy", blindly adding leverages, chains and channels.
The third is to draw attention to risks in "new" areas. Confronted with great changes and impacts brought by the financial market, diversified financial demands of clients and the rise of emerging industries, banks have to accelerate the efforts in new markets, launch new products and new business, find new clients and accelerate innovation, transformation and development. However, the risks in these "new" areas cannot be ignored, which requires follow-up of internal control and compliance management and needs to strengthen the source control and normative operation of innovation.
Base our bank on laws and compliance to protect our business
Confronted with the New Normal, banks have to establish strong compliance management culture, an effective compliance risk management system, a firm compliance and internal control management basis, various compliance management means, tools and features as well as management contents, so as to boost the healthy and sustainable development of business. As for IB, the compliance management of the group will focus on the following aspects:
Establish the awareness of the culture of compliance and internal control for all employees throughout the group. Highly emphasize on the top design of compliance culture. The board of directors and the management shall fully establish, supervise and implement the basis keynote of compliant operation, and deliver the idea of internal control and compliance to every employee throughout the group and in every process of business; govern the bank in a strict way and fully implement the system to evaluate, assess, supervise and control the compliance performance of leaders in all business operations, cultivate a compliant, stable and prudent culture; improve a multi-layered internal control and compliance evaluation system covering domestic and overseas branches, subsidiaries and all departments at the head office, and intensify the communication of compliance policies by evaluating “persons in charge”; promote the implementation of “thirteen prohibitions for employees” and urge all employees to comply with the prohibition rules; perfect the multi-layered internal control responsibility investigation and accountability system and foster rigid and effective accountability culture; keep promoting the management of compliance profiles of employees and monitor the compliance performance of employees. In 2017, IB has launched the “IB Sailing” year of internal control and compliance enhancement, in which IB will center upon five guidelines including “disseminate the culture of compliance, optimize procedures and systems, find out risks and improve risk control, strengthen reform and responsibility investigation, and ensure the guarantee for compliance management resources”, carry out refined management, vigorously advocate corporate culture of compliance featuring strictly observing one's duty and shouldering one’s responsibility.
Consolidate the basis for a complete regulatory system for internal control and compliance. Complete a systematic mechanism, timely transform various supervisory requirement into the policies, procedures and methods for company governance, business operation and risk control and ensure the implementation of various laws, regulations, rules and guiding document; insist on the comprehensive risk and compliance management based on the principle of "transparent management" and "substance over form", improve a full-process, fully covered and all-rounded risk and compliance management system, and intensify the "fire wall" for business development; improve a powerful constraining system in terms of the organizational structure, process management, responsibility system and performance management; enhance the construction of a sound team of compliance management and examination, and construct a "vertically and horizontally complete" compliance management system, improve the quality and efficiency of internal monitoring; achieve "three transformations" in internal control and compliance, which are "transforming short-term solution to long-term system construction; transform post factum remedies into beforehand prevention; transform external requirements into internal management force".
Increase the efficiency and enrich compliance management tools and means. Enhance the supporting and leading function of information technology on risk control and compliance control, increase the level of IT management and rigid constraint in risk control and compliance management; take managerial data mining from external examinations as the basis, use new technologies to efficiently collect and mine external data, improve the compliance information source integration platform of the group, enhance the group's capability in real-time monitoring of compliance and internal control; establish a comprehensively connected, all-rounded and fully dimensional screening system for abnormal behaviors of employees and case control and prevention system, continuously explore compliance monitoring and analysis in the mode of big data, and perform "accurate strike" on all kinds of violating acts; accelerate the innovation in technical means of internal control and compliance in line with Internet+, increase the ability to find problems and expose risks.
Emphasize on innovation while using compliance as the only standard to justify innovations. Continuously implement the financial innovation principle of "being beneficial in promoting the efficiency of serving the entity economy, reducing financial risks and protecting the legal rights of investors", return to the original purpose and focus on the main business, root compliance requirements deeply into the process of innovation; increase the authenticity management of innovative business, make business innovation as simple and transparent as possible, clarify the business structure and legal relationship and perfect risk control measures; strictly control the accessibility of innovative business, insist on the principle of "understanding clients and business"; the internal control must be in place when initiating, reviewing, approving, implementing and verifying business so as to prevent operational risks. For all these years, IB has firmly followed the main line of stable development, insisted on transformation and innovation, focused on meeting diversified financial demands and enhanced its ability to serve the entity economy. During the process of business and innovation, IB always follows market rules, supervisory rules, industrial rules and accounting rules. Supported by a series of legal provisions and compliance, IB has been looking for the opportunities to undertake business and create conditions for business and products to win the market while ensuring the innovative results and risks are clear, explainable and measurable.
Expand the sideline and make compliance management contents more extensive. Finance and entity economy feed each other. As the core of finance, the banking industry has to feed the entity economy, actively serve the entity economy and actively bear social responsibilities, which are important parts of compliance management for banks. In recent years, IB, according to the national policies in reducing taxes and banking costs, has actively developed strategies for micro and small-sized clients, rural clients, inclusive financial clients, clients performing mergers and acquisitions, as well as long limited projects, green finance projects and other "shortcomings". The handling charges of intermediary business have been waived or minimized to the greatest extent. IB has provided comprehensive financial services for clients to minimize the cost of financing, help them vitalize their assets and increase the efficiency of asset allocation. In addition, as the first equator bank of China and a pioneer and leader of green finance, IB has taken the initiative to involving the equator principle and the environmental social risk management into its requirements on compliance management and borne its social responsibilities. IB is the first in China to set up a professional team engaged in green finance for ten years, voluntarily expose the index of energy conservation and emission reduction as well as other social responsibilities, and has provided green financing in excess of RMB 1 trillion for more than ten thousand enterprises and projects so far.
This article is extracted from China Banking Issue V of 2017.