Ant Group Co. is planning to become a financial holding company overseen by China’s central bank, responding to pressure for it to fully comply with financial regulations, according to people familiar with the matter.
Recently, Chinese regulators told Ant, which is controlled by billionaire Jack Ma, to become a financial holding company in its entirety, subjecting it to stricter capital requirements, according to people. Ant, in response, has presented the authorities with an outline of a restructuring plan, they said.
The plan is a significant change by a digital payments juggernaut who in recent years has tried to convey its image as a financial services provider and become fashionable as an Internet technology company, which the has helped to get high ratings. Prior to canceling its initial box office offering in November, Ant had been on its way to making itself public at a valuation of $ 300 billion north, well above the market capitalizations of the world’s largest banks.
Designating Ant in its entirety as a financial holding company was not something previously planned by the company’s executives and stakeholders. In his listing quote last year, Ant said he intended for one of its subsidiaries to become a financial holding company and host its licensed financial businesses, such as asset management and lending. to the consumer. If you do it at the group level, Ant will be subject to a set of regulations similar to those governing banks and will affect their growth and profitability.
The restructuring plan, still under deliberation, could be finalized before China goes on holiday during a lunar New Year’s week in mid-February, people familiar with the matter said.
Any final plan will need the subscription of the Financial Stability and Development Committee, a super-regulator chaired by Deputy Prime Minister Liu He, two of the people said.
An Ant spokesman declined to comment. The People’s Bank of China, the Banking and Insurance Regulatory Commission of China and the Information Office of the Council of State made no comment.
Ant owns Alipay, a payment and lifestyle app with more than a billion users in China. It handled more than $ 17 trillion in digital payment transactions from the year to June 2020, generated short-term unsecured loans to approximately 500 million people, and sold many insurance policies, mutual funds, and more. investment products.
Ant’s payment and other financial services businesses have been subject to some regulations, but the group in general has long been spared the strict capital requirements and rules that banks, insurers, have been subjected to. and other traditional financial institutions.
Within the headquarters of Ant Group in Hangzhou, China, in October.
Photo:
aly song / Reuters
In December, four Chinese regulators convened Ant executives at a meeting and demanded the company rectify what they said were problems with their businesses. In a subsequent statement, Pan Gongsheng, deputy governor of the PBOC, punished Ant for “despising” compliance with the regulations and “engaging in regulatory arbitration,” without providing details.
Pan said regulators have made five lawsuits for Ant, telling him to go back to his payment roots, to protect personal data in his credit business, to establish a financial holding company, to improve corporate governance and to exercise more discipline in its values and assets. management companies.
Putting all of Ant’s business in a financial holding company would give regulators oversight of all of its activities and eliminate the potential for regulatory arbitrage, according to one person familiar with the plan.
The new structure will make it difficult for Ant to mix its general portfolio between its constituent units, which has allowed it to disguise the risks by moving them to more lightly regulated parts of the conglomerate, said Eswar Prasad, former head of the International Monetary Fund. Division of China and Professor of Commercial Policy and Economics at Cornell University.
“Financial regulators were concerned that Ant’s regulatory arbitrage would have allowed the company to provide a rosy picture of its overall financial position and hide the financial risks arising from its aggressive expansion into new lines of business,” he said.
Ant has formed a working group, led by chief executive Simon Hu, to work with regulators on how to rectify their business. The company has appointed a compliance director to oversee day-to-day compliance and restructuring tasks.
Recently, the major Chinese financial regulators hinted that they were happy with the progress made in Ant. On Tuesday, when asked during a virtual meeting of the World Economic Forum whether Ant would revive its IPO, PBOC Governor Yi Gang said that if the laws and regulations are complied with, “you will have the result. “.
He said consumers are widely satisfied with Alipay, but Ant has to resolve issues such as data privacy complaints before getting back on track.
Ant is working on segregating customer data that is currently shared between its business units to establish protocols that are common in banks, according to people who know the subject. Alipay has amassed a wealth of data on the spending habits and payment patterns of many people and has been leveraging them to provide loans and sell investment products to its users. It is a key reason why the company has been able to grow rapidly and diversify its business in recent years.
China’s new rules for financial companies, released last fall, apply to large conglomerates that have two or more financial businesses. They went into effect on November 1 and the affected companies have one year to apply to become a regulated financial holding company in the PBOC.
New measures for financial firms include regulatory requirements on shareholders, management, sources and uses of financing, risk management and corporate governance. They also require injecting additional capital into financial subsidiaries whenever necessary.
If Ant’s review is implemented, it could significantly reduce the company’s revenue growth and profits. Ant may also need to raise substantial capital to meet regulatory requirements and the company’s high valuation, based on its profitability and growth potential, could also be successful. Ant has already decided to lower lending limits for individual users of its digital lending services, a sign that it is shrinking its business to comply with regulations.
It is unclear how the restructuring would affect Ant’s non-financial businesses, such as the development of blockchain technology, digital lifestyle services and artificial intelligence technology, areas that the company has previously identified as drivers of growth.
Write to Jing Yang to [email protected]
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