Legislative Regulation Study On Usufruct Trust Products In China

Usufruct is often used in some laws and regulations, such as property law andCompany Law, and a lot of trust contracts in China. However, the term has differentmeanings in different contexts. In the context of usufruct trust, usufruct does not referto the usufruct of equity or ownership of assets, but financial claim based on equity orownership of underlying assets in the category of financial contracts.Judging from the type of usufruct, our existing usufruct trust products can bedivided into equity usufruct trust products and earning usufruct trust products. Fromthe trading patterns, it can be divided into usufruct investment trust products(including equity usufruct investment trusts and earning usufruct investment trusts)and usufruct property trust products (mainly earning usufruct property trust).Theformer refers that the usufruct is used as trust investment target in the situation thatthe money raised from trust scheme issued by trust companies is used for buying theusufruct of equity or underlying assets, then financiers will repurchase the usufruct atthe premium price and provide financing assurance. The latter refers that theusufruct is used as trust property in the situation that trust companies establishproperty trust scheme, and sell the unity beneficial right of trust to investorson behalf of principal, then deliver the raised money to financiers.Currently, earning usufruct trust products accounts for more than70percent ofusufruct trust products and90%of the capital raised by earning usufruct trust flows toreal estate. The others are equity usufruct trust products. From the transactionstructure, the majority of usufruct trust products is usufruct investment trusts, whilethe individual is earning usufruct property trust. Through studying on fund flow,transaction process and legal relations of usufruct investment trust products, the paperholds that the nature of these products has been alienation and become a disguisedloan financing instrument. Meanwhile, by factor analysis of earning usufruct propertytrust, the paper holds that earning usufruct is not required as trust property such asindependence of the trust property and isolation of risk，and has been become adisguised loan financing instrument.The usufruct trust products not only have been alienation but also faced somelegal problems, such as co-dependent trust property，absence of risk isolationmechanism, unredeemed fiduciary duties, non-standard information disclosure defalcation of trust funds, escape of legal regulation, guarantees defects and so on.Therefore， it is necessary to reflect on the development of these usufruct trustproducts, mainly from the legal position, the nature of trust, compliance and riskcontrol and effective supervision. Certainly, we need to take measures to regulate thedevelopment and bring them back to the essentials. Establish and improve relevantlaws and regulations about trust and formulate relevant guidelines on usufruct trustproducts to define the scope and confirm the requirements for financing partners.Strengthen the compliance and risk management of trust company, and the trustfiduciary duty and accountability mechanisms. Improve investors’ rights remedy andadhere to regulatory principle about substance over form, adjust regulatory ideas toachieve functional supervision.