Consumer Finance Shock: M1 and M2 Completely Ban Outsourced Collections

New rule, swift enforcement

Regulators have moved to ban outsourcing of M1 and M2 stage collections — overdue accounts within 60 days, including M1 — for licensed consumer finance companies (消金公司). It has been reported that the directive was circulated to multiple firms around the 2026 Lunar New Year, and local regulators have begun “one-company-one-policy” supervisory talks to press for immediate compliance. The stated aim: stop violent and illegal collection practices and force firms to own the full “pre-approval — on-book management — post-loan collection” risk-management loop.

Why the clampdown matters

Outsourced collectors long delivered “results-for-fees, risk transfer and easy performance pressure,” reportedly handling over 70% of M1/M2 workload. But rampant abuses and information leaks pushed consumer complaints up 118% year-on-year in 2025, regulators say. It has been reported that the supervisory letters cover five core dimensions — scale of third-party facilitation, credit-enhancement ratios, in-house collection, cooperative risk controls and related-party concentration — and were accompanied by a parallel notice tightening oversight of major shareholders to force clearer functional separation and stronger internal controls.

Cost shock and market ripple effects

The immediate cost of compliance is steep. Most consumer finance firms lack mature internal collection teams; M1/M2 accounts account for more than 60% of lifetime delinquency volume, so building compliant in-house operations will hit headcount and operating expenses. Collection costs already consumed 20.65% of revenue at leading firms in 2024 and are projected to rise above 30% after the rule. The change also alters the bad-loan market: 2025 outstanding personal-loan nonperforming principal reached ¥3,729.26 billion, and 23 of 31 pilot consumer finance sellers listed 235 loan packages totaling ¥705.19 billion. With in-house collection data missing and some firms likely to defer or shift assets to later windows for outsourcing, asset-sale discounts are expected to deepen — one-year delinquent packages average a 12.5% discount today, while five-year-plus delinquency averages just 1.8%.

Industry response and outlook

Some incumbents are racing to adapt. Zhaolian Consumer Finance (招联消费金融) and Mashang Consumer Finance (马上消费金融), among others, have set up board-level collection committees and are developing tiered teams that emphasize empathetic early reminders and structured escalation. Firms are also leaning on AI and big-data monitoring to reduce manual costs and improve compliance. Reportedly, regulators hope the move will push the industry back toward “financial services’ core” and break the scale-for-risk cycle. Winners will be those who can quickly build compliant internal teams and tech-enabled workflows; in the short term prices and AMCs’ appetite may be volatile, but a rational, tiered market for quality assets could re-emerge by the second half of 2026.