14 November 2016

Financial institutions: How far are you from the Cyber Security Law?

This article was written by Lou Xianying (Cecilia) (partner), Fu Guangrui (Mark) (managing associate), Gong Wenyi (assistant associate), Liang Yixuan (assistant associate) and Chen Yun (Robert) (partner).

On November 7th, 2016, China passed the Cyber Security Law (the “Cyber Security Law”) of the People’s Republic of China (“PRC” or “China”) after three readings of its drafts. The new law is to take effect as from June 1st, 2017. Being the first legislation in the cyber security field, the Cyber Security Law may have profound impacts far beyond expectations. For this reason, an in-depth study of the Cyber Security Law along with the relevant authorities’ further interpretations and practice would be necessary. 

The Cyber Security Law widely applies to the construction, operation, maintenance and usage of networks within the territory of China. It lays down specific regulatory requirements on the network operation and information security that network operators should abide by. Notably, the Cyber Security Law introduces the concept of “Critical Information Infrastructure (CII)”, makes specific references to the sector of the financial services under the definition of the CII, and imposes a higher level of cyber security protection obligations on the CII operators. 

On one hand, most financial institutions in China use the internet for the information collection, storage, and processing in the course of offering products or services within the territory of China. Under the Cyber Security Law, these institutions are most likely to be deemed as the so-called “network operators” and therefore should be regulated by the rules applicable to “network operators”. On the other hand, given the nature of financial institutions being the provider of financial services, we believe that financial institutions would be also classified as the “CII operators” that are falling within the stringent supervision regime, and are therefore required to implement the higher level of protection measures.

How would the Cyber Security Law impact the financial institutions in China? With the introduction of the Cyber Security Law, what obligations and responsibilities should the financial institutions particularly watch out for, and which new provisions worth further in-depth analysis? This article aims to sort out and respond these questions, and more issues about the Cyber Security Law will be addressed in the upcoming series of articles. 

Personal information and important business data must be stored in China, and are prohibited from being stored offshore without security assessment

The Cyber Security Law explicitly requires that financial institutions and other CII operators store in China the personal information and the important business data collected and generated by them during their operations within the PRC. Failure to comply with this requirement may lead to the confiscation of illegal gains, fines, revocation of the business permit or even the business license. Persons in charge of the offending institutions are subject to fines as well. Notably, the Cyber Security Law makes an exception for the offshore storing of data – “if for the business operation it is truly necessary for the data to be stored offshore i, a security assessment must be conducted by the designated regulatory authorities”. However, it is unclear in practice as to what constitutes being “for the business operation truly necessary” to transfer the data offshore. We await assessment criteria and guidelines to be further provided by the regulatory authorities. 

This requirement of the Cyber Security Law coincides with the PRC’s supervision strategy over financial institutions. In 2011, the People’s Bank of China (“PBOC”) published the “Notice on Urging Banking Financial Institutions to Strengthen the Protection of Personal Financial Information”. Banks are required by the said Notice to store, process and analyze within the PRC all the personal financial information collected by them in China, and are prohibited from transferring the personal financial information out of China unless otherwise provided by law. The corresponding rules adopted by the PBOC Shanghai and Guangzhou branches provide for exceptions to this restriction – banks are allowed to transfer personal financial information to their offshore headquarters, parent banks, branches, or subsidiaries, on the condition that such data transfer, which is for the business operation purposes only, has been duly authorized by the relevant customers and the information should be kept in strict confidence. 

It remains to be seen how this requirement of the Cyber Security Law would impact the current operation of the banking financial institutions in China. Considering the practical needs of sharing the personal financial information with the offshore affiliates, if foreign financial institutions in China intend to maintain their current data management mechanism, they should at least go through a “security assessment” following the “measures to be promulgated by the cyber security administration and the relevant regulatory authorities under the State Council”. We advise that financial institutions in China pay closer attention to the further measures and interpretations from the regulators, and make themselves well prepared for the adjustment to the data storage and processing methods that may be required. 

Financial Institutions are obligated to safeguard cyber security according to the Tiered Network Security Protection System

The Cyber Security Law introduces the concept of “Tiered Network Security Protection System”, aiming to strengthen the governmental supervision over certain key sectors, including the financial services sector, on the basis of such System. Furthermore, the Cyber Security Law provides for a series of cyber security requirements that the financial institutions should abide by. For instance, financial institutions should maintain the internet logs for no less than 6 months, and must take such measures as backup and encryption of the important data. Also, financial institutions are required to appoint dedicated security management bodies and personnel that have passed certain security check. 

Nevertheless, the Cyber Security Law fails to give a clear definition of the “Tiered Network Security Protection System”. In fact, the Cyber Security Law neither explains the substance or the implementing rules of the System, nor categorizes the tiers of the System. Financial institutions should stay tuned for updates regarding the CII and related protection measures expected to be issued by the State Council. 

Critical network equipment and dedicated network security products are subject to security verification or test; procurement of network products and services may require national security review

Pursuant to the Cyber Security Law, the critical network equipment and dedicated network security products must pass the security tests or verification by the accredited evaluation agencies before they can be made available in China market. Besides, network products and services may be subject to national security review if the financial institutions’ purchase of such products and services is deemed to have an impact on China’s national security.

It is true that financial institutions regularly procure equipment or software for storage, encryption and decryption of the financial data. Such equipment or software will probably fall into the category of the so-called “critical network equipment” or “dedicated network security products”. Financial institutions may anticipate a specialized catalogue of approved products to be issued by the regulators, and in the future procurement should request that their suppliers furnish the relevant cyber security certificates. Furthermore, so far there is no express guideline on how to judge a network product or service to be one that may “have an impact on China’s national security”. Financial institutions are encouraged to keep a close eye on the regulators’ interpretations in this regard. 

Carry out annual review and assessment to potential cybersecurity threats 

The Cyber Security Law requires that financial institutions and other CII operators, either by themselves or through third party agencies, carry out a review and an assessment of the cyber security threats at least once a year. Yet the Cyber Security Law is silent on the detailed assessment criteria and the qualifications of such agencies. It is advisable that financial institutions seek clearance from the regulatory authorities on this point. 

Apart from the aforesaid regulatory requirements on the financial institutions, the Cyber Security Law also sets out a number of requirements that are generally applicable to network operators. For example, network operators must take remedial actions to address the data leakage, report the same to relevant regulatory authorities and notify the data owners. Network operators are also required to be cooperative in the cyber security checks and other law enforcers’ inspections, and to provide the necessary technical support and assistance to the police and national security agencies safeguarding the national security and investigating the crimes. Financial institutions should pay enough attention to such generally applicable requirements. 

It has been more than 1 year since the first draft of the Cyber Security Law was published to seek public opinions in August 2015, yet certain provisions still seem vague and leave much room for further clearance. For example, how to interpret “using the internet within the territory of the PRC” given the interconnection of internet?Do banking products such as mobile banking tokens fall into the scope of the so-called “dedicated network security products”?Another example is while the Cyber Security Law excepts the information that “is processed to prevent specific persons from being identified and is irretrievable” from the personal data collection and usage rules, is the use of such information subject to any other restriction? We will share with you more of our observations on the above in the upcoming series of articles. 

Editor’s note: this article was simultaneously published on Chinalawinsight.com

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
Share on LinkedIn Share on Facebook Share on Twitter
    You might also be interested in

    Data is the new oil. It's valuable, but if unrefined it cannot really be used. It has to be changed into gas, plastic, chemicals, etc to create a valuable entity that drives profitable activity

    08 November 2021

    28 September 2021

    The manner in which China will regulate data security in the automotive industry has become much clearer.

    24 August 2021

    In 2021, China finally ended mandatory animal testing for most types of cosmetics products. However, it is not only rabbits that have reason to rejoice.

    17 August 2021

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.