Analysis of Appropriateness System in Financial Consumer Protection

This article is published in Journal of Yangzhou University (Humanities and Social Sciences Edition), Vol. 24, No. 6, November 2020.

Abstract: Financial consumer refers to a natural person who buys financial products or services with self-owned funds under a certain limit in the financial market to meet his own needs. Appropriateness system is the basic system of financial consumer protection. The Appropriateness system in China has a low level of legislation and differing norms, which affects the integration of financial consumer protection. Therefore, it is necessary to integrate the norms of the suitability system for the protection of financial consumers and establish a uniform suitability system for the protection of financial consumers by legislation to achieve uniform protection of financial consumers and provide a uniform standard for adjudication of cases involving disputes over financial consumption.

Keywords: Financial consumer | Appropriateness system | Financial consumer protection

In recent years, with the development of financial market, a series of regulations and normative documents have been issued, and the appropriateness system has become the basic system of financial consumer protection. When applying and perfecting the appropriateness system, how to define the different areas of financial consumer? How to understand that appropriateness system is the basic system of financial consumer protection? These problems are directly related to the rationality and value of the existence of this system, and need to be further clarified in theory. In the current situation of frequent financial cases, it has more practical significance.

I. Review of Appropriateness System in Financial Consumer Protection

The Guiding Opinions on Strengthening the Protection of Financial Consumer Rights and Interests (hereinafter referred to as the "Opinions of the General Office of the State Council") promulgated by the General Office of the State Council in 2015 clearly require the establishment of an appropriateness system for the protection of financial consumers, require financial institutions to assess and conduct dynamic hierarchical management of the risks and complexity of financial products and services, and improve the system for assessing financial consumers' risk preference, risk perception and risk tolerance to provide appropriate financial products and services to right financial consumers. The "PBC and Three Commissions" have also successively promulgated regulations, guidelines or opinions on appropriateness system in financial consumer protection.

According to Article 88 of the Securities Law of the People's Republic of China (hereinafter referred to as the "Securities Law") revised in 2019, "When selling securities and providing services to investors, a securities company shall, in accordance with the provisions, fully understand the basic information, property status, financial asset status, investment knowledge and experience, professional competence and other relevant information of the investors; truthfully state the important contents of the securities and services and fully disclose the investment risks; sell or provide securities and services that match the above conditions of the investors; where a securities company violates the provisions of Paragraph 1, thereby causing losses to investors, the securities company shall bear the corresponding liability for compensation."The Securities Law, for the first time, defines the basic contents of the appropriateness system in the form of law, clarifies the appropriateness obligations of securities companies, and imposes civil liabilities on securities companies for failure to fulfill their appropriateness obligations. This is an important breakthrough in China's appropriateness system legislation, and has provided a direct legal basis for determining the civil liabilities of financial institutions in violation of appropriateness obligations.

The Minutes of the National Court Work Conference for Civil and Commercial Trials (hereinafter referred to as the "Minutes") promulgated by the Supreme People's Court on November 8, 2019 also provides specific guiding opinions on the Trial of Cases Involving Disputes over the Protection of Financial Consumers' Rights and Interests, which sets an end to disputes over whether financial institutions' appropriateness obligations constitute statutory obligations in the trial of cases involving disputes over financial consumers' rights and interests and whether such Minutes serve as the basis for the trial of disputes over financial consumers. The Minutes take whether financial consumers fully understand the nature and risks of relevant financial products and investment activities and make independent decisions on this basis as the basic case facts to be ascertained, and accordingly protect the legitimate rights and interests of financial consumers in accordance with the law and regulate business activities of sellers.

Although the Minutes establish the rule of appropriateness obligation, providing the hearing criteria or standards for the trial of cases involving disputes over financial consumption, it cannot be ignored that the Minutes is neither a law nor a judicial interpretation, and cannot be directly invoked as a legal norm in the judicial documents. Therefore, in this sense, we cannot consider that the appropriateness obligations of financial institutions in general financial consumption disputes have become statutory obligations, or at most can be regarded as quasi-statutory obligations. At the same time, the Minutes fails to define the concept of financial consumers, although it uses the concept of financial consumers. If it is not clear whether the customers of financial institutions are financial consumers, it will lead to uncertainty about whether the appropriateness system can be applied in financial disputes, which makes it difficult to hear the cases. Therefore, what constitutes financial consumers in law and whether the appropriateness obligations of financial institutions established in the appropriateness system constitute statutory obligations still remain legislative loopholes, which must be finally resolved through legislation.

II. Definition of the Concept of Financial Consumers

(I) What are Financial Consumers?

Judging from the objects to which the Opinions of the General Office of the State Council is issued, financial consumers include investors in the securities and futures markets, policy holders and the insured of insurance contracts, and individual customers in the banking industry. From the perspective of external activities, this type of financial consumers' purchase of financial products or services is far from that of ordinary consumers, and it is difficult to directly equate the two types of activities. To provide equal or similar legal protection to the former and the latter, it is necessary to find common points or essentially common points between the former and the latter, otherwise it is difficult to treat them as consumers under the Law of the People's Republic of China on the Protection of Consumer Rights and Interests (hereinafter referred to as the "Consumer Law") and provide equal or similar protection. According to the definition of consumers in Article 2 of the Consumer Law, only the rights and interests of consumers who purchase or use goods or receive services for daily consumption are protected by the Consumer Law. For the financial consumers in the Opinions of the General Office of the State Council, their purchase of financial products from financial institutions is essentially the purchase of services, but it is a direct or indirect investment of creditor's rights or equity, and it is a behavior aimed at obtaining the benefits of property appreciation. Whether this behavior is the purchase of financial products or services for daily consumption needs to be further discussed.

From the perspective of the practice of the financial industry, in the highly developed financial market, financial needs, such as food, clothing, housing and livelihood, have become a part of personal consumption needs. It gradually emerges as the structure of consumer demand upgrades. It gradually emerges as living standards rise and wealth increases. It can be said that the financial consumption needs have become the basic life needs of the public. The personal rights and property rights of financial consumers in the process of financial consumption are an important part of civil rights. At the same time, the highly developed financial society is a high-risk society, and the pursuit of expected stability of life is the basic needs of everyone, everyone needs to work hard to avoid or reduce the impact of risk on life oscillation or adverse impact. As a citizen living in modern society, if he does not carry out moderate financial consumption activities, it means that he or she will automatically let his or her money and property lose, which is not in line with the common sense, basic social justice and social and economic development. At the same time, this behavior directly impairs the most important right among the basic rights of citizens: property right. Therefore, financial consumption activities are the basic needs of citizens to protect their own property rights and avoid property risks. Financial consumers purchase financial products or services for daily consumption needs.

For both investment institutions and professional individual investors, they pursue investment as their careers. The nature of their activities is commercial profit-seeking, which cannot be defined as financial consumption activities. That is to say, the investment made for commercial purposes or hedging activities by some commercial institutions or professional investors are not financial consumers, so they are not entitled to special protection for financial consumers. For natural person investors, if they use a certain amount of their own funds to purchase investment products or services in the financial market to achieve value preservation and appreciation so as to meet their living needs and maintain a stable standard of living (and the real value of monetary assets will be seriously devalued if they do not invest), they shall be deemed as financial consumers. The protection of financial consumers also directly relates to the stability of the financial market and prevention of systemic financial risks, so financial consumers should be specially protected.

From the perspective of commercial law, consumers are the opposite concepts to merchants or operators, and the basic elements constituting merchants or operators are commonality and profit-seeking. The so-called commonality refers to the economic activities that are engaged in for a long period of time, and take this profit-seeking as the basic source of income. The merchants or operators usually need to raise funds or get loans from financial institutions in business activities, and make profits by such business. For investors in the securities and futures market, investors who raise funds must have strong risk tolerance and professional standards, so taking advantage of others' money to make a profit is essentially a business activity, so investors in this case are not financial consumers. For investors who invest in the securities market with their own funds and the amount of their investment is small and not a common person and only aim to maintain or increase their value to make up for their living expenses, such investors should be deemed as financial consumers. In particular, financial consumers should not be merchants or business subjects, but can only be ordinary civil subjects in the General Rules of the Civil Law or the Civil Code. The newly adopted Civil Code of the People's Republic of China stipulates in principle the legal nature or status, rights and capacity of all civil subjects, including commercial subjects, because of the adoption of the legislative system of integration of civil and commercial subjects. The subjects established and engaged in business activities for the purpose of profit are commercial subjects in commercial law, including commercial individuals in natural persons, profit-seeking legal persons in legal persons and sole proprietorship enterprises and commercial partnerships in unincorporated organizations. The civil subjects other than these commercial subjects are called ordinary civil subjects, and only ordinary civil subjects purchase financial products or services become financial consumers.

From the perspective of legislation, the mode of separate operation in financial market has brought about the mode of separate operation in financial market. The Commercial Bank Law and the relevant rules and regulatory documents use concepts such as depositors, borrowers and bank clients to refer to the objects served by the banking industry; the Insurance Law uses concepts such as policy holders, the insured and beneficiaries to refer to the people who purchase insurance services and those who are guaranteed by insurance contracts; and the Securities Law and the CSRC use the concept of investors to refer to the people who invest in various securities products in the securities and futures markets. The multiple identities of investors have been confused along with the financial innovation in the financial market and the emergence of the mixed operation model in recent years. The financial products are increasingly integrated, and the financial services are increasingly commoditized. Investors often straddle the divisions of financial industries when choosing to buy financial products. Divisions such as deposits, insurance and securities have lost their commercial significance. When purchasing products or services from financial institutions, individuals gradually become a new group accepting comprehensive financial services, and their identities have changed from investors, depositors and policyholders to financial consumers. This process is the result of the evolution of financial markets and business practices. Take banking services as an example. In addition to the traditional banking services, such as deposits and loans and settlement, individuals can also become investors by purchasing wealth management products sold by banks, or by purchasing insurance products sold by banks on a commission basis. Thus, the customers of banks become the main body of the financial market, which integrates the identity of bank customers, investors and policyholders. Once such subjects have disputes, how to define the identity of legal subjects and how to apply the law is often a difficult problem in judicial practice.

Article 2 of the Implementing Measures of the People's Bank of China for the Protection of the Rights and Interests of Financial Consumers stipulates that "financial consumers refer to natural persons who purchase and use the financial products and services provided by financial institutions". Article 3 of the Guidelines for the Protection of the Rights and Interests of Banking Consumers stipulates that "banking consumers refer to natural persons who purchase and use banking products and receive banking services."Both the Implementing Measures and the Guidelines define financial consumers or banking consumers as natural persons who purchase and use the corresponding financial products and services provided by financial institutions, and do not further distinguish the financial professional capabilities of natural persons, but shall be deemed as financial consumers. It can be seen that PBOC and CBRC tend to define financial consumers and banking consumers as natural persons.

After a comprehensive consideration of the abovementioned domestic and foreign legislation, we can define a financial consumer as follows: "financial consumers refer to natural persons who purchase financial products or services from financial institutions with their own funds below a certain limit in the financial market or with the help of the services provided by financial institutions to meet their living needs."Based on this description, several criteria for defining a financial consumer are established: first, those who use their own funds below the statutory limit to make investment or purchase financial products and services; second, those who invest or purchase financial products and services mainly for the purpose of maintaining and increasing the value of their lives or avoiding the risks of their lives; third, such investment or purchase of financial products and services shall not be a regular business; fourth, they must be natural persons. Such natural persons may also become natural person shareholders in some companies, but are usually only financial investors, which are significantly different from other investors who seek to control or participate in the decision-making of the company and become shareholders in order to obtain dividends or spreads, which is essentially a business activity or business activity. Those meeting these four conditions are financial consumers and should be specially protected by legislation.

(II) Ordinary Investors Belong to Financial Consumers

Among the financial consumers referred to in the GOP Opinion, there is a big controversy as to whether natural person investors in the securities and futures markets can constitute financial consumers. Article 89 of the Securities Act and Article 7 of the Measures for the Suitability Management of Securities and Futures Investors (hereinafter referred to as the Suitability Measures) distinguish investors into ordinary investors and professional investors, emphasizing the special protection of ordinary investors. For some individual investors who meet their needs by maintaining their value, the ultimate goal of their investment is to meet their needs, and not to invest as a regular business. It needs to be clarified in legislation whether such investors should be protected as financial consumers.

The suitability system has covered all areas of the financial market, such as banking, insurance and trust, and has been initially established as an essential element of financial consumer protection. The Securities Act and the Measures for the Suitability Management of Securities and Futures Investors have established suitability systems at the legislative and regulatory level, but fail to clarify whether ordinary investors belong to financial consumers. The Securities Act and the Suitability Measures only use the concept of "investor" and classify investors into professional investors and ordinary investors. The Suitability Measures reversely define ordinary investors by adopting exclusionary provisions, that is, by defining professional investors and stipulating that investors other than professional investors are ordinary investors. Article 7 clearly stipulates that ordinary investors are entitled to special protection in terms of information notification, risk warning, suitability matching, etc. Through the backward inference of the scope of professional investors, we can see that, among natural persons, those who have the professional investment capability but whose financial assets or annual income have not reached the level stipulated in the Appropriateness Measures, those whose financial assets or annual income have reached the level stipulated in the Appropriateness Measures but do not have the professional investment capability as stipulated in the Appropriateness Measures, and natural person investors whose financial assets or annual income status and professional investment capability have not reached the level stipulated in the Appropriateness Measures are ordinary investors.

For natural persons who have reached the level stipulated in the Suitability Measures but whose financial assets or annual income level has not reached the level stipulated in the Suitability Measures, their investment activities with their own assets within the prescribed limit are typical financial consumption activities, i.e., those who have the professional investment capability but whose financial assets or annual income level has not reached the level stipulated in the Suitability Measures but whose financial assets or annual income level has not reached the level stipulated in the Suitability Measures but whose financial assets or annual income level has not reached the level stipulated in the Suitability Measures but whose financial assets or annual income status and professional investment capability have not reached the level stipulated in the Suitability Measures, their investment activities are typical financial consumption activities, i.e., their basic purpose is to maintain and increase the value of their life needs or to avoid life risks, and such investors are typical financial consumers. Therefore, ordinary investors are also financial consumers and should be specially protected by the law.

III. Analysis of the Suitability System in the Protection of Financial Consumers

(1) Basic contents of the suitability system

As mentioned above, in addition to the eight basic rights of ordinary consumers, financial consumers also include the corresponding rights of financial consumers protected by the performance of suitability obligations by financial institutions. Since the primary purpose of the suitability system is to protect financial consumers, we may use the suitability system norms in the "Trial of Cases Involving Disputes over the Protection of Financial Consumers' Rights and Interests" as the basis for determining the basic contents of the suitability system. According to Article 72 of the Minutes, suitability obligations are the obligations to know customers and products, and to sell (or provide) appropriate products (or services) to appropriate financial consumers when sellers promote and sell high-risk financial products such as bank insurance trusts and funds to financial consumers, as well as provide services to financial consumers when they participate in high-risk investment activities such as securities margin trading, new third board (NEEQ), growth enterprise market (GEM), STAR market (GEM), and futures. The purpose for sellers to assume suitability obligations is to ensure that financial consumers can make independent decisions and bear the returns and risks arising therefrom on the basis of a full understanding of the nature and risks of relevant financial products and investment activities.

From the perspective of financial institutions, suitability system is a legal obligation that should be borne by financial institutions when they sell high-risk financial products or provide high-risk investment services to financial consumers. If, from the perspective of financial consumers, financial consumers, when purchasing high-risk financial products or services from financial institutions for high-risk investments, have the right to require the financial institutions to comply with the suitability obligations for appropriate sales or provision of appropriate services, we might refer to this right as the financial consumers' suitability right. Specifically, the suitability right of financial consumers protects financial consumers' basic rights, such as the right to property security, the right to know, the right to independent choice, and the right to fair trading, which are comprehensive rights. The suitability obligation of financial institutions includes the following aspects: firstly, understanding the contents and risk levels of financial products and services; secondly, understanding the financial conditions, risk preference and risk levels of financial consumers; thirdly, fully explaining the contents of products and services to financial consumers and warning them of risks; fourthly, recommending appropriate products (or services) for sale (or provision) of appropriate products (or services) to appropriate financial consumers. On this basis, financial consumers may independently choose financial products or services. If financial institutions fail to fulfill or properly fulfill their suitability obligations, financial consumers' right to know and right to fair trading will be directly infringed first, and then financial consumers' right to independent choice will be substantially infringed. If financial consumers suffer any property losses as a result thereof, the right to property security will be infringed. The suitability system also establishes financial consumers' right of claim for property damage caused by financial institutions' failure to fulfill suitability obligations.

(II) Suitability system is the main difference between financial consumer protection and general consumer protection.

The information disclosure system in traditional financial markets is the basic system for investor protection. The presumption of the information disclosure system is that once investors are provided with complete and accurate information, they can make rational investment decisions so as to realize effective allocation of resources. The system takes a "believe and let go" attitude towards investors' freedom of decision making, that is, the rationality of investors will guide them to make decisions that maximize their own interests. However, the system is based on the fact that investors are bound to make mistakes, even if they are provided with complete and accurate information. Therefore, the system takes a "doubt and limit" attitude towards investors' freedom of decision making, that is, they cannot choose the financial products that best suit their needs, and thus transfers the option to financial institutions with more professional knowledge and more rational abilities. If the investor is still regarded as an "adult" capable of making rational decisions, the investor in the system is regarded as a "minor" who needs to be cared for by financial institutions and cannot make rational decisions, and needs to be restricted to protect their interests. Of course, compared with the total denial of the freedom of decision making in guardianship, the restriction on investors' freedom of decision making in suitability system is not so much. Investors can still make final decisions within the range of products that financial institutions "tailor-made" for them, but investors usually cannot make decisions outside of the bundles of financial products that financial institutions select for them.

On the basis that financial institutions fulfill suitability obligations, financial consumers can fully understand the nature and risks of relevant financial products and investment activities, and make independent decisions on the basis that they bear the returns and risks of investment. This is the embodiment of the principle of "autonomy of will" in private law.

For ordinary consumers in the Consumer Law, the products they consume are mainly tangible material products or specific services, and consumers can clearly perceive the function and quality of the products or services. The risks of the products or services can be seen or predicted by the manufacturers or sellers. The consumers can meet their life needs through the consumption behavior, the consumption risks can also be clearly recognized by the consumers themselves, and the risks are tangible. In ordinary consumption activities, it is not necessary for sellers or providers of the products or services to assess the risks of the products or services, the financial status or risk tolerance of consumers, let alone whether the products or services they sell are suitable for consumers, because whether the products or services they sell are the basic elements of their right to choose. Therefore, ordinary consumer protection does not include the suitability system.

The suitability system is manifested in the form that financial institutions fulfill their statutory obligations to restrict financial consumers' right to choose financial products or services. That is, financial consumers can only choose to buy financial products or services within the scope of financial products or services provided by the financial institutions to them according to the suitability principle and have no right to choose financial products or services beyond the said scope, which is a restriction on financial consumers' right to choose financial products or services. For financial institutions, performing suitability obligations is both their obligation and their right. In the consumption scenario of ordinary consumers, sellers or providers of the products or services have no right to restrict consumers' right to choose independently, while in the consumption scenario of financial consumers, financial institutions may exercise corresponding restriction right according to the requirements of suitability system. Therefore, suitability system is a unique system for financial protection, and only financial consumers can enjoy the suitability right of financial transactions.

The suitability right is also obviously different from general consumer rights in nature. The general consumer right is a single specific right, while the suitability right is a comprehensive and reciprocal right, which requires financial institutions to treat financial consumers before or during a transaction, and relies on the financial institutions' right to realize the suitability right of financial consumers by performing suitability obligations at the time of inducing or providing financial products or services, so as to protect financial consumers' right to know, right to property safety and right to fair trade, on which financial consumers shall conduct financial transactions by exercising their right to choose independently. Therefore, suitability system is the unique and basic system for the protection of financial consumers, and the protection of financial consumers is mainly achieved through the suitability system. The Trial of Cases Involving Disputes over the Protection of Financial Consumers' Rights and Interests in the Minutes focuses on the rule of suitability obligations and the application of relevant laws, which shows that the Supreme People's Court also believes that the suitability system is the basic system for the protection of financial consumers.

IV、 Conclusion

The financial consumer protection system with suitability system as its basic content has been initially established in Mainland China. However, there has not been any unified legislation on financial consumer protection, and even the concept of financial consumer has not been established in legislation. In view of the frequent occurrence of financial consumer disputes, which may even lead to systemic financial risks if not dealt with in a timely and effective manner, it is necessary and urgent to enact a unified financial consumer protection legislation with suitability system as its basic content, so as to provide unified suitability norms and unified standards for the protection of financial consumers for transactions in the financial market.