Judicial Intervention in Financial Supervision and Its Power Boundary: Take the Standard of Financial Loan Interest Rate as an Example

Abstract

The boundary between court intervention and financial supervision should be reasonable. On interest rate regulation, there was a balanced power allocation between judiciary and administration. On the one hand, the People’s Bank of China （PBC） was authorized by the Law on PBC to independently implement interest rate policies on financial loans. Due to the fact that interest rate control conflicts with market mechanism, the PBC initiated interest rate marketization reform on RMB financial loans and completely removed rate ceilings and floors. It turned its role from ex ante control to ex post regulation, including interest rate monitor, special inspection, and administrative penalty. On the other hand, the Supreme People’s Court of China （SPC） has historically acquired jurisdiction on the interest rate of informal loans. It made the four-time interest rate rule” and ceiling of 24% rule”, and restricted its authority to informal loans. As the policy changes, however, the judiciary expanded its jurisdiction to the interest rate of financial loans. This power expansion is embodied in two ways: abstract rulemaking and case-based adjustment. Regarding abstract rulemaking, the SPC issued unified requirements to limit financial interest rates by judicial documents such as the Several Opinions on Further Strengthening Financial Adjudication, which unfavorably impacts the power allocation between judiciary and administration. The formal financial market with high compliance does not require uniform rate control because interest rate liberalization is beneficial for reflecting real credit costs and optimizing resource allocation. If a money-borrower has a high credit risk, the lender would require a high rate to cover this risk, which is not necessarily unreasonable. It is problematic for the judiciary to adopt a one-size-fits-all” strategy to uniformly restrict financial rates, as the judicial control lacks formal rationality, substantive rationality or explicit delegation. The abstract rule-making of SPC violates the principle of judicial deference” and should be rectified. For case-based interest rate intervention, local courts may adjust financial rates according to discretion in adjudication. Empirical study in this article finds that court intervention on financial interest rates is not consistent. Whether the court steps to intervene is influenced jointly by several factors, including loan type （personal or business loan）, purpose （for consuming or commercial use）, amount, and maturity. In case-based interventions, the court may refer to the interest rate rules on informal loans, apply the principle of fairness, exert adjustment of overdue rates, or implement the policy of financial consumer protection or other public policies. The tendency of intervention should be corrected when the intervention lacks reasoning and causes confusion. Judicial intervention in financial loan interest rates should be limited to case adjustment under the framework of legal dogmatics. Intervention should be exercised exceptionally rather than routinely. In order to achieve a higher level of rule of law, specific rules should be applied preferably to abstract principles, while public policies should be converted to practical rules before application.