Abstract: Incorporating the resolution of non-performing personal credit disputes into the law is necessary to ensure the sound development of personal credit business, promote demand growth, help borrowers out of trouble, and maintain social stability. The key to making acceptance of personal credit disputes easier is technology enablement. Legal and financial technology is a trend of the time, so it had better be properly managed as early as possible. First, all sectors need to cooperate spontaneously to launch pilot promotions in designated regions. Secondly, it’s necessary to regulate the operation of technology companies providing such services and determine qualification standards and modes of auditing and supervision. Third, defining the rules, boundaries, rights, and procedures for interconnecting, collecting, applying, and preserving data between banks, law firms, courts, and companies is important. Fourth, it’s essential to recognize the special characteristics of financial consumers and rationally determine the requirements, assessment content, and assessment methods of financial consumer protection. Fifth, the scientific formulation of court assessment methods should not lead to a legal void. Sixth, in the process of digitizing the law, there is a need to balance the roles of judges and AI in mediation and adjudication.
China’s banking industry has been systematically launching personal credit businesses on a large scale since about 20 years ago. With the rapid economic growth, personal income has generally grown substantially and, overall, has not gone through a general fluctuating cycle. Therefore, the whole society has still been exploring and accumulating experience in risk management and risk disposal of personal credit businesses.
In recent years, excessive marketing of Internet finance, the pandemic, and declining personal incomes as a result of the economic downturn have led to the non-performance of substantial personal credit assets. China’s financial industry may undergo a series of declines in personal credit asset quality. As it stands, the effective disposal of non-performing personal credit assets in line with the law is a crucial challenge for financial institutions and the whole society.
I. THE LACK OF EFFECTIVE MANAGEMENT OF NON-PERFORMING PERSONAL CREDIT
In China’s social and economic development, the rapid development of personal credit business is inevitable and, notably, overlaps with the rapid development of its economy, so people are confident in future income growth. Neither the demand side nor the supply side of the personal credit business nor the social stakeholders are experienced in dealing with the risks of this business and are even less prepared for the risks to evolve into social problems.
The original personal business of commercial banks, the main force on the supply side of personal credit business, was mainly about savings, in which they waited for customers to come. Besides the publicity work and advertisements during the peak season when they solicited savings, they basically had no interaction with customers outside their business spots. When they began to develop personal credit business, on the one hand, the business expanded rapidly due to the economic upturn; on the other, during the Internetization, the banks mainly focused on innovation and marketing, resulting in a lack of opportunities and willingness to engage in in-depth and face-to-face exchanges with customers.
Credit risk management not only controls customers’ credit records and income levels but also figures out and addresses risks based on how income, consumption habits, attitude towards life, behavior, character, and environment affect different groups of customers, such as in determining the tactics used in the collection and the way to communicate with defaulters.
As Internet finance and other services develop personal credit businesses with attracting more users as a priority, they have almost given up the prudence of credit business, making excessive personal credit a major social problem. Neither banks nor other lending institutions are able to effectively manage massive personal non-performing loans through collection and other regular ways.
Banks have difficulties in dealing with small amounts and large numbers of personal non-performing assets. First, they lack experience in dealing with customers and are poor in collection. Second, solving so many businesses, whether through collection or legal proceedings, consumes huge manpower, material, and financial resources. Third, it’s hard to determine whether a collection and outsourced collection accords with the current consumer-protecting standards.
Taking the legal route is the best way for the banks to solve the problem, but they face financial limits and the unwillingness of law firms and courts to accept the cases.
Personal credit business is small in amount and large in number, but it requires almost the same number of legal documents as a large debt dispute case. As the input and output are disproportionate, lawyers and firms are unwilling to accept such cases.
Most courts have already been overloaded, and staff can hardly deal with substantial personal credit disputes. Moreover, the court system has a variety of assessments, including the rate of cases issued, settlement, mediation, and so on. A batch of personal credit disputes from one financial institution is enough to spoil the assessment indicators of a court. Therefore, in most cases, courts refuse to engage in such cases.
In this embarrassing situation, collection and anti-collection industries emerged. Violent collection and malicious anti-collection disturb the financial order and social stability. To some extent, this is contributed by the absence of related laws.
Under such circumstances, the legitimate rights and interests of financial institutions as creditors and defaulters as borrowers are not adequately protected. In reality, most borrowers are willing to repay when they borrow. However, due to special circumstances, their unplanned, irrational consumption, or other reasons, they cannot repay on time and thus become a defaulter. They may experience great physical and mental difficulties and will become even more desperate if they encounter violent collection. At this moment, as defaulters and defendants, they also need legal protection to eliminate bad credit records, get rid of the predicament, and go back on track. Incorporating personal credit disputes fully into the legal fold can be considered a significant aspect of legal inclusion.
II. THE KEY TO DISPUTE FILING: TECHNOLOGY ENABLEMENT
The above aspects have made the transfer of personal non-performing credit assets difficult. An asset management company that accepts non-performing assets has fewer human and financial resources. Without legal proceedings, it can’t deal with such non-performing assets.
It should be recognized that not only is there a large stock of non-performing personal credit assets, but with the continued development of the personal credit business and economic fluctuations, substantial non-performing personal credit assets each year will become a norm, even within the normal non-performing rate. Incorporating the resolution of non-performing personal credit disputes into the law is necessary to ensure the normal development of personal credit business, promote demand growth, help borrowers out of trouble, and maintain social stability, which accords with the rule of law. The key to making acceptance of personal credit disputes easier is technology enablement.
Technology helps solve personal credit disputes legally. It is a transboundary application and innovation of digital technology combined with financial and legal technology, known as legal and financial technology. The key to innovation is to tackle the following bottlenecks: first, the mass production of considerable standard legal files of personal credit disputes, which is the hardest step for banks, law firms, and courts; second, the mass acceptance of law firms and courts; third, the mass service of court notices and pre-litigation preservation; fourth, the automatic mediation enabling law firms and courts to interact with borrowers; and fifth, the automatic trial.
At present, some technology companies already provide these services, and some of them have done a good job. They mainly adopt technologies such as big data, cloud computing, and artificial intelligence to firstly govern banks’ substantial credit files, produce standardized legal texts, and provide applicable operating systems for banks, law firms, and courts, respectively. On this basis, they provide relevant business systems to law firms and courts, enabling them to accept and hear cases fully automatically, as well as online and multi-option mediation solutions to banks and debtors, allowing both parties to communicate manually if necessary, and ultimately reaching an acceptable and humane mediation agreement.
These efforts have saved the labor and time costs of banks, law firms, and courts, and case acceptance has become much more efficient; courts preside over cases, helping enhance trust from defaulters and thus improving the active response rate; humanized and multi-option mediation plans well preserve the rights and dignity of defaulters, improving the success rate of mediation and thus the rate of bank’s repayment.
Such legal and financial technology, if widely promoted, can not only make financial institutions more efficient and effective in dealing with non-performing assets but also better protect the legitimate rights and interests of financial consumers, reject violent collection, counter-collection, and other undesirable phenomena, provide a favorable environment for transferring personal non-performing assets, and realize legal inclusion.
III. SIX SUGGESTIONS FOR LEGAL AND FINANCIAL TECHNOLOGY
1. All sectors should cooperate spontaneously to launch pilot promotions in designated regions. The market and the private sector have been spontaneously innovating and applying legal and financial technology, but the quality, innovation approach, and understanding of the parties concerned vary significantly. Some have generated social benefits, some are wandering in the gray area, and some engage in violent collection and anti-collection in the name of technology. Legal and financial technology is a trend of the time, so it had better be properly managed as early as possible. This cross-professional and cross-industry process requires efficient cooperation among courts, financial regulators, and local governments. For prudence, it’s important to select some regions for pilot promotions.
2. It’s necessary to regulate the operation of technology companies providing such services and determine qualification standards and modes of auditing and supervision. As law and finance are public, they must be effectively regulated on a market-oriented basis.
3. It’s important to define the rules, boundaries, rights, and procedures for interconnecting, collecting, applying, and preserving data between banks, law firms, courts, and companies.
4. It’s essential to recognize the special characteristics of financial consumers and rationally determine the requirements, assessment content, and assessment methods of financial consumer protection.
Consumer protection in general industry and commerce mainly focuses on the quality, price, quantity, and marketing of products and services, essentially one-off purchases and deliveries. Some goods have after-sale services, which do not change their one-time purchase and delivery nature. Financial products and services, especially those of banks, are different.
First of all, a depositor demands the convenience of deposit and withdrawal, deposit security, and an interest rate as high as possible. When borrowing, this person expects the threshold and interest rate to be as low as possible, the repayment requirements as loose as possible, and the principal and interest to be waived. These demands differ from those of general goods and services consumers, and sometimes, the demands in different businesses are opposite.
Furthermore, most financial transactions are not one-time buy-and-sell deliveries, and some financial consumers may not even pay a price.
For example, with deposits, consumers do not purchase any goods or services; they temporarily place their funds in a bank and, after a certain period, retrieve their principal along with interest. When buying financial products, even though it's referred to as a purchase, it's actually an investment, and after a certain period, the principal and returns are also retrieved. In the case of loans, it's the reverse process: borrowers temporarily borrow a sum of money and, after a certain period, must repay the principal and interest. When investors buy or sell stocks through a securities company, the main service provided is the trading service, and they charge a trading service fee. As for the stocks bought or sold by investors, the securities company is neither a dealer nor an agent.
In summary, all of these transactions involve a service process, and financial institutions often do not charge a price for the financial assets themselves that consumers are transacting with.
Therefore, the consumption behavior of financial consumers differs from that of consumers in other industries. It is necessary to define the content and form of financial consumer rights based on these specific characteristics. On this basis, requirements, standards, and assessment methods for the protection of consumer rights by financial institutions should be established.
Assessing and penalizing solely based on customer complaint volume, complaint rates, or complaint growth rates may be overly simplistic. This approach not only fails to effectively protect the legitimate rights of financial consumers but also harms the legitimate rights of financial institutions. When a borrower is unable to fulfill their repayment obligation upon maturity, it is the bank's legal right to engage in debt collection. As long as it does not involve violent or intentionally harmful tactics and does not infringe upon the rights of the debtor, it should not be subject to penalties.
If, through bank reminders and debt collection efforts, the debtor can negotiate repayment, it is, in itself, a form of protection of the debtor's rights. This approach, which does not require legal action, not only saves both parties the cost of dispute resolution but also reduces a significant amount of societal cost.
5. The scientific formulation of court assessment methods should not lead to a legal void. Under current conditions, a significant number of personal credit dispute cases are indeed challenging for the existing resources of the courts to handle. The application of legal and financial technology can facilitate pre-litigation mediation and case processing for such a large volume of cases without requiring a substantial increase in court resource allocation. However, due to certain assessment criteria imposed on the courts, some courts refuse to accept related cases. This phenomenon runs counter to the requirements of building a rule-of-law society.
Various disputes and controversies in society are a normal occurrence, and this is precisely why human societies need the rule of law. It is only through effective legal intervention that these disputes and controversies can be resolved effectively, preventing ordinary civil disputes from escalating into serious criminal cases, thereby realizing a society based on the rule of law and integrity. A rule-of-law society and an integrity-driven society do not mean the absence of civil disputes, nor do they depend on the number of disputes; instead, they hinge on the ability to resolve disputes properly and in accordance with the law. Therefore, it is necessary to scientifically formulate and improve assessment methods for grassroots courts.
6. In the process of digitizing the law, there is a need to balance the roles of judges and AI in mediation and adjudication. While the law provides standards and guidelines, in specific cases of mediation and adjudication, decisions should still be made based on the specific individuals and events involved. Moreover, current AI technology is far from matching human intelligence, so it is essential to prevent the oversimplification of judgment through AI, which could lead to the marginalization of the discretionary power of judges and other related issues. Therefore, in advancing the digitization of the law, it is necessary to establish a system for reviewing relevant models before their use, conducting checks and improvements during their application, and also implementing a system for random human intervention.
This article has been published on Caijing May Flower. The views expressed herewith are the author’s own and do not represent those of CF40 or other organizations.
