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Title: Regulation of related party transactions of financial institutions in China
Other Titles: Zhongguo jin rong ji gou guan lian jiao yi jian guan
Authors: Sui, Ping (隋平)
Department: School of Law
Degree: Doctor of Juridical Science
Issue Date: 2009
Publisher: City University of Hong Kong
Subjects: Related party transactions -- China.
Financial institutions -- State supervision -- China.
Notes: CityU Call Number: HF5681.R33 S94 2009
viii, 358 leaves 30 cm.
Thesis (JSD)--City University of Hong Kong, 2009.
Includes bibliographical references (leaves 337-358)
Type: thesis
Abstract: In financial industry, the phenomenon of related party transactions with agent-principal problem commonly exists. Related party transaction is a type of activity in economic life, which becomes the object of legal regulation because the agency problem and conflicts of interest in it may give rise to unfairness of the transaction. In this research, the author makes reference to the suggestion of economic theory of agency problem to give a structural picture of the transactions, which describes related party transactions as transactions concluded by “agent” on behalf of “principals” with agent himself or his related parties sharing common interest with the agent. In such definition, the concepts of “agent” and “principal” are in the economics’ meaning referring the relationship in which the achievement of one party’s interest is relied on actions taken by another party. Person who is relied in the transactions is “agent”, while the relying person is called “principal”. Such definition has an additional benefit that it indicates the three roles and corresponding three relations with different supervisory issues. In related party transaction, at least three parties are involved playing different roles. Correspondingly, different legal relationships exist between different parties playing different roles. Such analysis is useful for dentifying from which relation the agency problem and the conflicts of interest stem because the agency problem and conflicts of interest are resources of unfair related party transactions. From a legal point of view, in Chinese civil law, different legal relationships between private parties are established based upon different legal facts. Correspondingly, different legal relationships will confer different rights and impose different duties on parties. Therefore, it is sensible to analyze the legal nature of the relationships of different participants and their roles in financial institutions’ related party transactions. One of them is the relationship between agent and his principal. They establish a contractual relationship of providing service between them in related party transactions, a relationship constituting the basis of agent-principal relation. The focus of regulating such relation is how to establish mechanisms to promote and supervise ‘agent’ to serve the interest of principals honestly and diligently. In regulating such relation based upon service providing contract, some external and internal strategies are employed to balance informational asymmetry and supervise agents’ fulfilling their contractual duty. In nature, internal and external supervisory strategies as well as corresponding civil liability systems are aimed to increase principals’ right to information. The arrangements are to engage professional supervisory agents with informational ability. Furthermore, supervisory agents also need to be empowered to collect relevant information necessary for supervision. Therefore, in regulating related party transaction in financial industry in China, laws and regulations should pay more attention to the supervisory agents’ informational ability and their power to have adequate access to relevant information. In addition, as agent-principal relation is established upon service providing contract including beneficiary contract, civil liability system in civil law will be applicable in case of occurrence of breach of supervisory duty. Another relationship exists between the actual contracting parties of the transaction transferring financial resources. In such contractual relationship, one party is the principal, and the other party is that related with agent acting on behalf of the principal, or sometimes, just the agent himself. In such resource transferring legal relation, the expression of legal intent of customer may be distorted and the contract may become invalid according to the rules of Chinese civil law. In financial regulations, some restrictions on related party transaction are demanded. In the context of financial integration, the prohibition to some extent decreases the economics of scope provided by the integration. As a substitute for prohibition, approval, consent by misrelated parties or disclosing relationship before the deals are commonly adopted. In nature, the mechanism of approval and consent is to not allow interested parties to make expressions of legal intent on behalf of customers of financial institution with plenary power as they usually do. To back up the controlling approaches in transferring relations, legal liabilities are necessary. Except the related administrative punishment for the related unlawful behaviors, civil liabilities rules apply. When it comes to the legal outcome of contracts without effective prior approval, Chinese civil law demands that only with the approval or consent of informed principals, can the expression of legal intent be intact, genuine, and one with legal binding force, otherwise, the expression is with some flaw that would make related legal act nullified at the election of delegating parties. Moreover, asset acquired as a result of a contract shall be returned after the contract is confirmed to be null and void or has been revoked. If the shifted asset can not be returned or the return is unnecessary, it shall be reimbursed at its estimated price. The third relationship is the transferring relation based on common interest between the agent and its related parties. To prevent related parties’ undue influence on the transactions in financial industry, legal rules set up some systems to prevent the making of common interest and to cut off the channel of influencing between agent and the principal’s counterparties. The specific controlling measure commonly adopted is the firewalls, or sometimes called Chinese wall, between the related parties or financial institutions’ internal departments to prevent the undue influence on parties who make, or take part in the making, the expression of legal intent on behalf of protected parties. The civil liability of counterpart related parties of the transaction is indispensable for supervising related party transactions. In China, the joint and several liability system in tort law sometimes can be the legal basis for holding shareholders liable. While joint liability can hold the contracting related parties to be liable for damages, it fails to hold their holding company liable. In some circumstances, the principle of piercing the corporate veil of company law would be applied. Furthermore, in financial institution’s unfair related party transactions, material things are rarely involved and thereby scarcely are body and property damaged. Therefore, in Chinese financial law, it is necessary to expressly establish the compensation system for pure economic loss. In China, the administrative regulatory authorities are main power to control the indecent behaviors in financial market, including the unfair related party transactions. To ensure related supervisory rules are observed by financial institutions, the periodical and unperiodical on-site inspections and off-site inspections are necessary. To enforce the rules of financial regulations, the regulatory unishments are set up. In China, the organizational form that financial nstitution shall take in the context of financial integration is a hotly debated issue. The institutional structure of universal banking in practice has advantages over the model of financial conglomerate. By and large, China has had a comprehensive supervisory system of related party transactions. However, as indicated by this research, there are still many flaws in existing system, especially in respective of consumer protection. Generally, the financial authorities have to take the private interest of financial consumers seriously and make more reference to the voice of legal scholars of private law in policy making. Key Words: Related Party Transaction; Agent-Principal Relation; Informational Asymmetry; Informational Ability; Information Power; Common Interest; Conflicts of Interest; Financial Integration; Universal Banking; Internal Control; External Control; Default Rules; Immutable Rules; Beneficiary Contract; Civil Liability
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