The Dominance of Regulatory Oversight in Chinese Investment Trusts

Abstract

<p>In common law jurisdictions with long-established judge-made law, regulations only play a supplementary role in <em>adapting</em> the trust for professional wealth management. By contrast, in jurisdictions such as China that <em>adopt</em> the trust for professional wealth management, both government regulation and judicial decision-making regarding trusts start from ground zero, so the boundary between these two governing regimes needs to be drawn afresh. </p><p>In some ways, regulations have an edge over national law and judicial decision-making. The procedures for enacting regulations are much more time-efficient than they are for national statutes, and the haphazard nature of litigation can be avoided. Moreover, regulators can be granted wide powers, such as the suspension of operating licenses and the imposition of administrative or criminal sanctions, to rein in errant service providers. In other ways, judicial decision-making fares better. In applying the law, judges address conflicts between the rights of trust parties inter se in a real-life setting, and are largely free from the influences of social and political considerations.</p><p>This chapter examines the Chinese regulation of collective investment trusts, which presents an interesting case study of the tension between regulation and judicial decision-making. In many instances where Chinese trust companies fail to perform their duties as trustees, regulators have been all too quick to intervene. This over-reliance on regulations has proved to be an unjustified limitation on the proper development of trusts law, for it deprives the courts of the opportunity to develop meaningful jurisprudence to guide future trusts, thereby impeding the development of consistent trust law rules. For a recent example, to tackle the failure of trust companies to segregate client assets and their promises of a minimum level of profits to clients, the Chinese government issued the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions in 2018. The Opinions laid down the fundamental principle of ‘maizhe jinze, maizhe zifu’ (卖者尽责 买者自负); that is, if the sellers act responsibly, the buyers take responsibility for their losses. By contrast, the courts refrained from playing a proactive role in handling the foregoing case: they have taken a back seat in determining the liability and remedies of such trustee actions in private law. We therefore argue that China’s adoption of the regulation-centred approach limits the proper development of trusts law.</p><p>This chapter studies the interactions between regulations and the Trust Law in the day-to-day management of trust assets and the problems associated with the regulation-centred approach. Our discussion proceeds in three substantive parts. After Part I, ‘Introduction’, Part II analyses the problems encountered in the administration of collective investment trusts in China due to inadequacies in the provisions of the Chinese Trust Law. Part III discusses the dominating role played by the regulators to address these problems and their limitations. Part IV compares the regulation-based approach with the court-based approach, reflecting on ways to invigorate the irreplaceable role of the courts in enhancing the administration of the trust. Part V concludes.</p>