China’s P2P Lenders Now Required to Appoint Commercial Banks as Fund Custodians

(Beijing) — Chinese regulators have further tightened rules to clamp down on fraud and misuse of funds in the scandal-plagued peer-to-peer (P2P) lending industry by requiring lending platforms to appoint commercial banks as custodians of investor funds.

Under the new rules, investor funds received by a P2P platform must be stored in only one commercial bank before they are lent to borrowers, the China Banking Regulatory Commission said on Thursday. The policy echoes a series of measures issued last year that limits P2P platforms to the role of facilitating small private loans and related information sharing.

While the requirement for a custodian account was already touched upon among the previous measures, most banks were just paying lip service to cooperating with P2P firms because it meant taking on risk that outweighed the potential benefits, according to several bankers and P2P firm employees. To reassure commercial banks, the new rules stipulate that custodian banks will not take responsibility for P2P lending platforms’ defaults.

“The online P2P lending industry is still at an early stage in our country,” said a spokesperson in a statement posted on the banking regulator’s website. “Some platforms’ investor funds lack third-party supervision and it’s common for the platforms to set up fund pools and seize or misappropriate client funds. Some even ran away with clients’ money, which has gravely hurt investor interest.”

Only 180 out of the country’s more than 2,000 P2P platforms have signed agreements with commercial banks to open custodian accounts by the end of 2016, the spokesperson said, citing third-party data.

The Chinese government has counted on P2P lending platforms to give loans to individuals and small businesses shut out of the conventional banking system, but fraud has arisen due to a lack of regulation. Confidence in the sector dwindled last year after Ezubao, once the country’s largest P2P platform, imploded. The business conducted by the platform turned to be a Ponzi scheme, which bilked more than 50 billion yuan ($7.3 billion) out of about 900,000 people in less than two years.

There were 2,388 P2P platforms in operation in January, up from just 200 in 2012, according to Wdzj.com, an industry data provider. Outstanding loans from P2P lending platforms totaled 856 billion yuan by the end of January, almost doubling the amount from a year earlier.

Contact reporter Chen Na (nachen@caixin.com)