By Shu Zhang and Matthew Miller
BEIJING (Reuters) - China's government has approved a plan to clean up the country's online financial sector, according to people with direct knowledge of the matter, including rules to limit the activities of P2P lending firms, the source of recent fraud scandals.
The plan, drafted by China's central bank, follows a mid-April video-conference with 14 ministries and regulators organized by the State Council, the country's cabinet, which approved the plan document seen by the sources.
It outlines stricter rules for peer-to-peer (P2P) platforms, where lending quadrupled last year to 440 billion yuan ($67 billion), according to Citigroup (NYSE:C) research, forbidding them from holding clients' capital in-house.
Instead, client funds must be deposited with a qualified third-party banking institution and kept separate from a P2P platform's own corporate funds. Firms must also set up "firewalls" to manage transactions with affiliates.
"The online finance sector has entered a tough period this year," Wang Zhijian, CEO of FuYin, a Shanghai-based P2P platform, said at a financial forum on Friday.
"Good platforms welcome government regulation for a simple reason: without good rules, bad players push out good players," said Wang, adding a lack of regulation forced all platforms into unfair competition.
In February, authorities arrested 21 officials of Ezubao, once China's biggest P2P lending platform, which collected $7.6 billion inside two years from more than 900,000 investors. It used savvy marketing, authorities said, to fund "a complete Ponzi scheme" that used investor funds to support a lavish lifestyle for company executives.
Last month, police arrested 21 executives at Zhongjin Capital Management - a high-profile Shanghai-based platform that promised retail investors double-digit returns for short-term projects - accusing them of "illegal fundraising."
"These big cases are neither online finance nor P2P. They are frauds covered in the name of P2P and online finance," Wang Sicong, chairman of P2P platform eLoan told Reuters. He said eLoan's business dropped by a third after the Ezubao fraud was exposed.
Internet lending has made headlines not just in China recently, with the U.S. Department of Justice investigating San Francisco-based Lending Club Corp (N:LC) which has admitted falsifying documentation when selling a package of loans.
COLLABORATION
China's cabinet is urging the 14 ministries to work together and share information to clean up the online finance sector, the sources said.
The government is also calling for the establishment of a centralized registration system for Internet financial products and a unified platform for Internet bank accounts.
The plan restricts what online financial platforms can do without a license - from raising cash to fund real estate projects to engaging in financial services such as asset management. It also creates additional responsibilities, such as a requirement to match a client's risk profile to the investment products they sell.
The plan also forbids false advertising of financial products, and prohibits non-financial companies from registering names including "finance", "asset management", "P2P", "payments", "fund", and "trading exchange".
An inter-government body led by the central bank is also being set up, with representatives from the banking, securities and insurance regulators, along with the State Administration for Industry and Commerce and the Ministry of Housing and Urban-Rural Development.
The plan calls for those ministries and departments to complete their field investigations by July and finish a sector-wide clean-up by November. The cabinet intends to issue a report by next March.
China's central bank and State Council did not immediately respond to requests for comment.
The contents of the plan document also appeared on social media in China on Friday, and in Chinese media earlier.