China P2P Lending
South Korean won, Chinese yuan and Japanese yen notes are seen on U.S. 100 dollar notes in this picture illustration (Photo: Reuters / Kim Hong-Ji)

One of China's biggest online wealth management platforms, Lufax, is reportedly scaling down its core peer-to-peer (P2P) lending business.

The company, which is backed by financial services giant Ping An Insurance, has reportedly been forced to cut down on the activities of its core business due to regulatory hurdles.

The company, also known as the Shanghai Lujiazui International Financial Asset Exchange, is apparently wary about China's recent crackdown on domestic business that poses very high financial risks. Lufax's P2P lending business gets its funds from retail investors, which it then uses to loan to smaller companies and individuals.

According to a report citing sources close to the matter, Lufax is planning to slowly scale down its business while it actively applies for a legitimate license to operate in the consumer finance sector.

The exact details regarding its slow shutdown are still unknown and the way it will be handling its outstanding business has also not yet been detailed.

A renewed focus toward consumer financing with a valid license from regulators is likely the best move for the company, especially if it wants to achieve its goal of being publicly listed on the stock markets.

The company initially planned to be listed in Hong Kong early last year, but it was forced to place those plans on hold following uncertainty over China's consumer lending regulation updates.

Lufax was originally set up in 2011 as a P2P platform for Ping An Insurance. With the boom in P2P lending in China, the company's business grew rapidly. Its rapid growth caught the eye of Chinese regulators in 2014, following a string of fraud complaints from the company's customers.

Regulators immediately cracked down on smaller and much riskier P2P lenders in an attempt to prevent potential financial bubbles from exploding.

In 2016, Lufax attempted to legitimize its operations by registering its company with local authorities. However, the company found it hard to comply with the requirements. Regulators required P2P firms to provide proper records of the flow of funds between its retail investors to its borrowers.

Companies were also required to submit reports on online deposits and set up proper accounting systems and fund deposit clearings. All of the borrowers and guarantors also needed to be registered with the company.

The tougher regulations likely proved to be too much for the company, leading to its decision to scrap its P2P lending business altogether.

The fact that financial regulators such as the China Banking and Insurance Regulatory Commission (CBIRC) openly told Lufax that it wouldn't be able to register as a P2P lender also didn't help its cause.