As China’s e-commerce industry continues to surge, authorities have clarified their regulatory stance on online advertising practices and the online sale of food products. These changes continue the trend towards greater regulation of e-commerce in China, following the introduction of tax changes earlier this year and the announced “Positive List” which will commence on 11 May 2017.
Companies selling products online should expect greater scrutiny over their marketing materials and claims made about their products. To avoid being penalised, companies should take urgent action to review all WeChat posts, website content and claims made on their online stores.
The two new regulations clarify the application of the ‘Advertising Law’ and ‘Food Safety Law’ and are due to commence on 1 September 2016 and 1 October 2016 respectively.
China’s Advertising Law and new regulations
China’s current Advertising Law came into force on 1 September 2015 and introduced significant changes to advertising regulations, particularly in relation to the use of celebrity endorsements and the advertising of specific goods and services, including health foods, education and investment products, dairy products and pharmaceuticals. The Advertising Law also introduced higher fines and additional powers for the regulatory body, the Administration for Industry and Commerce (AIC).
The new Interim Online Advertising Regulation Measures (Advertising Measures) were published by the AIC on 4 July and will take effect on 1 September 2016. The Advertising Measures clarify how the existing law applies to online marketing activities and confirms that it also applies to online advertisements promoting goods or services in the form of texts, pictures or videos which contain links, email advertisements, paid search advertisements and commercially displayed advertisements.
Products and services affected
Advertisements for products or services which fall under the categories of medical treatment, pharmaceuticals, food plans for medical purposes, medical devices, pesticides, veterinary drugs and health food products will need to be reviewed and approved by the relevant authorities before they can be published online.
The design and production of online advertisements
Companies or individuals will not be allowed to design, produce, act as agents for or publish on the internet any advertisements for goods or services that are prohibited by law.
In addition, all online advertisements must be clearly distinguishable and explicitly marked with the label "advertisement," and online advertising publishers, agencies, client-side platform operators, media-side platform operators, advertising information exchange platform operators and members of media-side platforms will be placed under strict supervision.
Penalties and the AIC’s powers
The new Advertising Measures confirm and detail the investigative powers of the AIC over online marketing activities. They include the power to conduct on-site searches, issue questionnaires, produce documents, and review and copy agreements, bills, books, advertising works and relevant background data.
The penalties of conducting illegal advertising are significant. The maximum fine for false and misleading advertisements, or advertisements of ordinary food products claiming disease prevention or treatment functions, is up to five times the total advertising fees. A company may also have its business license revoked or be prohibited from publishing any advertisements for a period of one year if the AIC deems that the company’s conduct is a serious violation, including where the company has not cooperated with the authorities’ investigations and in the case of multiple offences.
China’s Food Safety Law and new regulations
China’s current Food Safety Law came into effect on 1 October 2015 and imposed stricter controls and supervision of food production, distribution, sales and recalls. Following efforts to improve food safety, the China Food and Drug Administration (CFDA) recently released Measures on Investigating and Penalising Unlawful Conduct Concerning Online Food Product Businesses’ (Food Measures), which will come into force on 1 October 2016.
Licenses for food production and operation
The Food Measures impose stricter obligations on online platform providers (such as Taobao and JD), and vendors using either online platforms or their own websites to sell food. It will require those companies to make filings to the CFDA and obtain a food production license (if the seller is also a food producer) or operation license before operating an online food sales business. Companies should only sell products or conduct online business purely within the scope specified by their food production or operation license. These licenses will need to be displayed on the seller’s website or on their third-party platform stores.
It is important to note that the food operation license requirement does not extend to cross-border food trading through C2C channels (e.g. “Daigous” through private communications on WeChat) and although the Chinese Government may attempt to apply the same strict rules on offline food sales to online food sales (and restrict the C2C business model) in the future, it may be difficult for them to enforce those requirements in the same way.
Food and healthcare products
Vendors selling health food products, food for special medical purposes and infant formula will also need to display their product registration certificates or record-filing proof, and advertisement approval codes with a link to the search page of the CFDA, on their online stores. The Food Measures also require that online food vendors should not make health protection claims in relation to non-healthcare foods, and online vendors of infant formula should not claim that the products improve intelligence, immunity or protect the digestive system. Online vendors of healthcare products should clearly state on their website that their healthcare products are not substitutes for medicine or drugs.
Penalties and the CFDA’s powers
The Food Measures provide the CFDA with a variety of investigation rights, including the right to carry out on-site searches, sample inspection of food products traded online, conduct interviews, review and copy relevant materials. It also extends the application of the accountability interview mechanism under the Food Safety Law to online food sellers. Legal representatives or management personnel of online food stores may also be requested by authorities to attend their interviews to respond to queries and/or accept their warnings if the products sold have food safety issues, the online food sellers fail to promptly resolve food safety issues or they fail to reduce or eliminate food safety risks.
The Food Measures provide two sets of penalties for non-compliant conduct:
- fines ranging from RMB5,000 to RMB30,000 for failure to comply with the license reviewing (for third-party platforms), license display and trade information recording obligations; and
- penalties for prohibited conduct under the Food Safety Law, such as platforms’ failure to stop providing services to illegal online sellers and online food vendors selling products beyond the scope specified on their licenses.
Implications for the e-commerce industry
While the Chinese authorities continue to be supportive of e-commerce and the ability for foreign companies to enter the Chinese market, it is also clear that regulations are tightening and authorities will continue to focus on consumer protection and food safety. The Advertising Measures and Food Measures impose significant obligations on companies involved in the marketing and sale of food online and are likely to significantly impact on current activities. We understand that Australian regulatory authorities have started to take a more interventionist approach in relation to export permits, so the Chinese authorities are not alone.
Companies engaged in e-commerce in China need to ensure that they:
- Revisit their marketing practices, including the content of their websites and online stores
- Ensure that all material is reviewed before being published online
- Ensure advertisements have been approved by authorities if they are for medicinal or health foods, medical devices or drugs
- Monitor ongoing developments as further changes are expected.