On July 13, the Supreme People’s Court and the China Securities Regulatory Commission held a national joint conference on promoting the pilot program for a multi-dimensional dispute resolution mechanism for China’s securities and futures industries, where the country’s highest court and top financial regulator assigned the work plans for implementing the Notice on Implementing the Pilot Program of a Multi-Dimensional Dispute Resolution Mechanism for the Securities and Futures Industries in Certain Regions in China. Jiang Bixin, Deputy Secretary of the CPC Committee of the Supreme People’s Court and Vice President of the Court, and Jiang Yang, member of the CPC Committee of the China Securities Regulatory Commission and Vice Chairman of CSRC, each delivered a speech on advancing the pilot program.
The conference was chaired by Du Wanhua, special member of the Judicial Committee of the Supreme People’s Court (vice-minister level), and Huang Wei, member of the CPC Committee of CSRC and Assistant Chairman of CSRC, announced the mediation organizations for the pilot program. Officials and heads from the Central Political and Legal Affairs Commission, Ministry of Justice, People’s Bank of China, China Banking Regulatory Commission, China Insurance Regulatory Commission, the Supreme People’s Court, and CSRC attended the main meetings. Representatives from the higher people’s courts, CSRC regional offices, and pilot mediation organizations of where the pilot program is being tested spoke at the event. Officials and heads from the national court system, securities and futures regulatory system and related mediation organizations, as well as representatives of mediators and securities and futures companies, totaling more than 700 people, took part in the meetings via videoconferencing.
Raising Market Confidence through Proactive Dispute Resolution
– Speech by CSRC Vice Chairman Jiang Yang at the National Joint Conference on Promoting The Pilot Program For A Multi-Dimensional Dispute Resolution Mechanism For China’s Securities And Futures Industries
Esteemed Vice President Jiang Bixin, Special Member Du Wanhua, our colleagues,
Good afternoon. Thanks to the commitment and support from the Supreme People’s Court, the Court and the China Securities Regulatory Commission were able to officially release the Notice on Implementing the Pilot Program of a Multi-Dimensional Dispute Resolution Mechanism for the Securities and Futures Industries in Certain Regions in China in recent days for implementation. This document marks an important institutional arrangement of the people’s courts and securities and futures mediation organizations on creating a multi-dimensional dispute resolution mechanism that is flexible and efficient in coordinating available resources and highly convenient to the general public; it is crucial to protecting the lawful rights and interests of investors in accordance with the law, to maintaining an open, fair, and just capital market and promoting its sustained, sound development; and it signifies that China has taken another solid step in building a general institutional framework for investor protection. On behalf of CSRC, I’d like to express our most sincere gratitude to the leaders and members of the Supreme People’s Court and the national court system for their valuable support, guidance and assistance in the reform and development of the capital market and in market supervision and enforcement.
China’s domestic capital market is a vibrant trading place with over 100 million investors. For the capital market to better support China’s demand side reform and real economy, we will need our small and medium investors to be rational, value investors. Without the participation of these investors, both the unique liquidity advantage of our market and the direct financing functions of the capital market will be greatly diminished. It is fair to say that, by supporting the growth of China’s real economy, small and medium investors are a major engine that drives the upgrade of our financial market system and domestic capital market reforms. Therefore, to further enhance the direct financing functions of the capital market, it is imperative to protect and maintain the enthusiasm of small and medium investors, which requires a comprehensive, systematic and authoritative legal system that grants and safeguards equal rights, equal opportunities, and equal rules for all. This is our one and only approach to boosting the appeal and competitiveness of our capital market. Besides effective ex ante and ongoing institutional arrangement and protective measures that safeguard investors’ right to know, right to participate and right to receive profits as provided by law, it is more important for an investor protection system to feature potent and effective ex post remedial measures that, whenever the lawful rights and interests of investors have been violated or their financial interests have been damaged, can provide concrete help and support to them so that they may receive timely and adequate rights and financial remedies. Once such a system is in place, we will not only be able to mitigate and resolve disputes and improve social stability, but more importantly, we will also be able to impose economic penalties and other costs on wrongdoers, thereby correcting dishonest or unlawful behaviors, creating a fair and just market, and boosting investor confidence and fundamentally stabilizing market expectations. In this sense, effective investor protection and dispute resolution is the key to fostering confident investors and creating a fair, efficient, and flourishing capital market.
The Central Committee of CPC and the State Council both believe in the necessity of a multi-dimensional dispute resolution mechanism. Since last year, President Xi Jinping has on multiple occasions stressed the importance of investor protection. He pointed out that it is imperative to “accelerate the formation of a stock market with full-fledged financing functions, sound institutional frameworks, effective market supervision and adequate investor protection” as well as the need to “strengthen market supervision and protect the rights and interests of investors.” Meanwhile, during the NPC and CPPCC sessions this year, Premier Li Keqiang emphasized that government agencies must fulfill their respective duties in protecting the lawful rights and interests of financial consumers and investors. The Opinions on Further Strengthening the Protection of the Lawful Rights and Interests of Small and Medium Investors in the Capital Market, released by the State Council in 2013, provided specific policy measures on establishing a multi-dimensional dispute resolution mechanism and improving the existing reparation system for small and medium investors. At the end of last year, the General Office of the CCCPC and General Office of the State Council jointly released the Opinions on Improving the Multi-Dimensional Conflict and Dispute Resolution Mechanism, requiring that government agencies should explore the approach and means to prevent and mitigate conflicts and disputes in light of the newest developments, so as to eliminate to the maximum degree the factors that threaten social harmony, resolve the instigating, fundamental or underlying issues that undermine social stability, and ensure that all people may live and thrive in an orderly society and stable nation. The Notice released by the Supreme People’s Court and CSRC is designed to timely address the challenges faced by dispute resolution and investor protection efforts, as finding a solution to these issues will not only be significant to the stable and sound development of the capital market, but also vital to the modernization of our country’s governance system and capacity as well as to achieving social equality.
With the rapid development of China’s multi-tiered capital market, new products and services offered in the securities and futures industries are featuring ever more complex trading arrangements. Because small and medium investors are relatively weak at identifying risks and defending themselves, it is not all that uncommon to see their rights and interests being violated or damaged by others, driving up the number of controversies and disputes in recent years. In 2015, CSRC’s 12386 hotline received close to 100,000 investor complaints, and only 17,000 of them were processed in that year. Needless to say, dispute resolution presents a significant challenge.
In addition to the challenge presented by the sheer volume of conflicts and disputes involving capital market investors, the mitigation of these conflicts and disputes must also require the recognition that they are different from conventional civil and commercial disputes in some significant aspects. Firstly, disputes in capital market affect a much broader demographic. A dispute arising from a single transaction or disclosure often affects many unspecified parties; release of false information by a listed company frequently damages the interests of thousands of investors; and such disputes can easily involve investors all over China and send ripples throughout the country. Secondly, these disputes involve substantial economic interests. Violations of securities and futures laws and malpractices tend to be accompanied by considerable economic interests. In major cases like Shenzhen Hirisun Technology, Wanfu Biotechnology, and other companies that made false statements, the final indemnity all exceeded hundreds of millions of yuan. And if any dispute arises from financing arrangement, securities lending, structured funds and other leveraged trades, the economic losses suffered by the victims may be many times greater still. Investors have high expectations for remedies when their interests have been damaged, and just as high an expectation for the resolution of disputes. Thirdly, these disputes are highly technical. On the one side, products and services offered by the securities and futures industries have increasingly complex structures that the understanding of the various trading models and trading rules demand specialized market knowledge; on the other side, securities and futures trading that leverages central counterparty and modern IT systems is characterized by its fluidity and efficiency, which makes the application of law with respect to such questions as the scope of qualified plaintiffs and causality an especially complex and delicate matter. Fourthly, these disputes require the market to be able to quickly stabilize market expectation. Trading in the capital market is based on forecasts. Any fact or information, including information about events or legal disputes involving investors, which may affect the transaction price of securities and futures should be clarified and publicized in accordance with the law at the earliest moment. Therefore, should conflict or dispute occur, market participants would have high expectation that there would be a prompt decision and conclusion to help their investment decision-making. In other words, for the capital market, the speed and efficiency of dispute resolution are crucial.
Looking at the practices of the more mature overseas markets, we see that these countries have generally created a system with a diverse toolset to address the unique conflicts and disputes in the capital market. In particular, in addition to the standard civil litigation system, the US, Germany, and Taiwan, China have respectively introduced the class action litigation, model case litigation, and group litigation system. Other measures including creating specialized investor dispute mediation organizations either as an extension of existing industry associations or as separate investor protection entities. For example, the ombudsmen at Germany’s Bankenverband, UK’s Financial Ombudsman Service, and Taiwan’s Securities and Futures Investors Protection Center are all charged with mediating investor disputes. It is worth emphasizing that when settling investor disputes, mature markets especially gravitate toward leveraging the professionalism and authoritativeness of their regulatory agencies who, through special legal and institutional arrangements, have the power to intervene in and resolve civil disputes involving the rights and interests of investors, underscoring the leadership role of administrative authorities. Such institutional arrangements include the authority to order buybacks or suspension of trading, administrative mediation, and compensation fund, which are available in the US and Hong Kong markets.
To resolve the disputes arising from the domestic capital market, China needs to draw upon the experiences of other countries while taking into account domestic particularities, and establish a complete set of rules that are well matched to the characteristics of the disputes arising from domestic capital market. The essential element is to create a multi-dimensional dispute resolution mechanism that is not only authoritative and professional, but also efficient, convenient to use and cost-effective. The Notice recently released by the Supreme People’s Court and CSRC is an important institutional advancement in creating a securities and futures dispute resolution mechanism after distilling previous practices and experiences. The Notice contains a wide array of institutional and mechanics innovations, including, among others: (1) Creating a pilot program for securities and futures mediation organizations that are recognized by the court, which has enhanced the authoritativeness of these organizations; (2) Prescribing the judicial affirmation system for mediation agreements through which qualified mediation agreements may be enforced by people’s courts upon request; (3) Establishing the process for supervising the performance of mediation agreements. For mediation agreements that meet statutory requirements, the people’s court may issue a payment order upon request by the concerned party; (4) Creating a special exemplary judgement system. Disputes that meet certain criteria may be settled as a group, where the people’s court will demonstrate laws and the uniform application of law through its judicial judgement, serving as a reference for the mediation of similar disputes in the future; and (5) Affirming the validity of a wide range of convenient civil dispute settlement methods such as online mediations.
The release of the Notice represents a major effort of the Supreme People’s Court in reforming the judicial system, promoting the rule of law, and enabling “the general public to feel being treated fairly and justly in every judicial case.” This document contributes to raising the efficiency of judicial resources and boosting the growth of the capital market. It offers care and protection to millions of investors in China and provides firm support to the supervisory efforts of CSRC. Agencies in the CSRC system should take the release of the Notice as an opportunity to make bold explorations and active efforts in mediating and settling the conflicts and disputes in the capital market.
Firstly, the agencies should enhance their capacity to settle disputes. The quality of mediation determines investor satisfaction, the court system’s confidence in the mediation process, and linkage of the mediation process to the judiciary. Organizations in charge of coordination should ensure that the mediation program has well-developed rules, adequate organization, and professional teams. Specially, said organizations should strictly regulate the mediation rules and process to build a solid foundation for the pilot program; strengthen the administration of each link in such processes as acceptance of dispute cases, negotiation and mediation, linkage between litigation and non-litigation proceedings, and performance of agreement, so as to boost the quality and efficiency of mediation; broaden the mediator recruitment channels, increase the number of full-time mediators, train gold-standard mediators, and continuously raise the quality of the mediation team to enable it to win the confidence of investors through its expertise, professionalism, and fairness.
Secondly, the agencies should innovate and explore new dispute mediation mechanisms. Mediation in the context of the domestic capital market had a late start, resulting in urgent demand from investors and large growth potential. The pilot mediation organizations should seize these opportunities and demonstrate leadership, duly implement the requirements stipulated in the Notice, and promote innovations in mechanism and approach guided by investor needs. In terms of mediation approaches, in addition to the traditional face-to-face mediation, the agencies should be adept at using modern IT systems to realize video mediation and online mediation. In terms of mediation process, the agencies should lean toward flexible, investor-friendly, and efficient mechanisms, experiment with expedited process for small claims, and shorten and simplify the processes to reduce the mediation timeline. With regard to the recognition of the legal force of mediation agreements, the agencies may develop special arrangements in favor of small and medium investors in dispute cases that satisfy pre-determined conditions, such that once the mediation agreement is executed, the concerned company will be required to perform its obligations on schedule so that investors’ expectations with respect to their interests are met at the earliest possible time. In sum, dispute mediation is an alternative institutional arrangement that requires voluntary participation by both parties. The agencies must innovate and work diligently to enhance the appeal of the mediation as a means to settle disputes.
Thirdly, the agencies should coordinate their efforts to make dispute mediation a streamlined process. The Supreme People’s Court has provided in the Notice many special policies and measures that are especially valuable to and supportive of the mediation organizations in the CSRC system. Accordingly, the mediation organizations included in the pilot program must treasure the understanding and support given by the Supreme People’s Court, adroitly use and navigate the policies and mechanisms designed to link mediation with litigation, and strive to raise the quality of service of securities and futures dispute mediation to higher levels. Local securities regulatory bureaus that do not yet have a pilot mediation organization in their jurisdiction should build the conditions for hosting these organizations. Namely, they should engage the people’s courts and other related government agencies in the pilot zones, build effective communication channels and working mechanisms, and endeavor to help more mediation organizations meet the admittance requirements of the pilot program so that they too can be connected to the court system. For-profit market participant should respect the investors’ choice, work with investors in mediations, duly perform the mediation agreement, and treat resolving investor disputes as a key measure for improving internal management, enhancing service level and boosting competitiveness. Small and medium investors whose rights and interests were damaged should arm themselves and seek remedies by filing a complaint with mediation organizations. Whether it’s the organization and management of regulatory authorities, implementation of mediation organizations, cooperation of market entities and rational participation of investors, the unifying philosophy is that all stakeholders in the pilot program should make joint efforts to create a new, viable model for the resolution of disputes in the securities and futures industries.
A mature multi-dimensional dispute resolution mechanism is one of the cornerstones of the capital market. Agencies in the CSRC system should take the opportunities provided by the Notice and be committed to making the pilot dispute mediation program a success and offering ever greater protection to investors. We are confident that, with the strong commitment of the Supreme People’s Court and the support from people’s courts at all levels and the stakeholders, mediation of capital market disputes will achieve notable progress, and more and more small and medium investors will receive remedies and compensations from dispute mediation, and the programs designed to protect capital market investors will garner higher approval from the investor base and more recognition and support from the general public.