China has overhauled a 30-year old law governing beauty products and cosmetics, as the market for these goods continues to surge each year. To give some perspective to that growth: retail sales of cosmetics in China – from native Chinese companies to the cosmetics divisions of Western luxury goods purveyors, skincare companies, and big-names in beauty goods – increased by approximately RMB 40 billion ($5.72 billion) between 2018 and 2019, alone, valuing the market at a whopping RMB 300 billion ($42.91 billion) or more as of last year. Such growth has not escaped the attention of regulators, who released the new Cosmetics Regulation on June 16, 2020.
Taking effect on January 1, 2021, the new regulation makes a large number of changes to the previously existing law – from the inclusion of e-commerce-specific updates to addressing how the process of gaining approval for new ingredients will be handled, all of which place an emphasis on compliance throughout the entire life cycle of individual cosmetics and beauty products, and increases responsibilities of cosmetic license holders to ensure product safety and quality for the ultimate benefit of Chinese consumers.
A few of the key elements of the regulation (for native Chinese and international companies, alike) are highlighted below …
Enhanced Compliance Obligations for License Holders
The soon-to-be-implemented regulation places significant requirements on cosmetic license holders, making them responsible for compliance obligations related to the cosmetic products they make and sell. For instance, cosmetic license holders are required to establish a quality assurance system and an adverse event monitoring and evaluation system to ensure quality and safety of their products throughout the product lifecycle.
Companies are also responsible for designating individuals within their ranks to specifically manage quality control and the distribution of products, and are required to publish evidence and reference documents on a government-designated website to substantiate and support claims they make about the functionality of their cosmetic products.
For foreign license holders, the law requires that they designate a Chinese legal entity to handle the regulatory matters for them in China in relation to product registration or notification, as well as adverse event monitoring and recall reporting.
Stimulation of Innovation for New Ingredients
Under the current regulation, all new cosmetic ingredients are subject to a lengthy approval process. On the contrary, the new regulation requires only certain high-risk new ingredients (e.g., preservatives, sunscreen ingredients, colorants, hair dyes and whitening agents) to be approved by the regulatory authority. Applicants of other unlisted new ingredients only need to go through a simplified notification process.
The new regulation implements a three-year monitoring period for newly approved or notified ingredients. After the expiration of the three-year period, the relevant new ingredient can be listed in the Catalogue for Ingredients in Use, assuming a safety concern did not arise.
New Rules for E-commerce Platforms
Online sales of cosmetic products are booming in recent years, which is why the new regulation includes specific e-commerce language, something that the regulation did not have prior to the recent overhaul. According to the new regulation, e-commerce operators should (i) record and verify the identity of cosmetic distributors or retailers that trade on their e-platforms; (ii) require that these distributors or retailers refrain from conducting any acts that would violate the regulation; (iii) report misconduct to the supervising authority; and (iv) suspend a distributor’s or retailer’s ability to engage in c-commerce services in connection with serious non-compliance. The new regulation also requires that cosmetics distributors and retailers to accurately disclose all the required information of cosmetic products that they trade on e-commerce platforms.
Outstanding Questions under the New Regulation
The new regulation redefines “special cosmetics” – i.e., ones that are subject to special or heightened regulations – as cosmetics used for hair dye, perm, skin whitening, sunscreen, anti-hair loss, and cosmetics with new functional claims. The regulations specifies what types of products fall within this realm to a certain extent. However, the scope of “cosmetics with new functional claims” awaits further interpretation by the regulatory authority.
Impacts of the New Regulation
The new regulation’s emphasis on innovation and compliance may reshape the landscape of cosmetics industry. The shortened time to market of new ingredients brings opportunities to innovative cosmetic market players, while the increased responsibilities of cosmetic license holders and severe consequences for non-compliance will likely force cosmetic companies to improve their quality management system and perform their obligations more diligently through the product lifecycle.
Should companies fail to abide by the terms of the regulation, penalties can be levied upon foreign cosmetic license holders, as well as their Chinese designees. If foreign cosmetic license holders refuse to accept the penalties, their products could be banned from importation for up to 10 years. Meanwhile, if the Chinese designees fail to assist foreign cosmetic license holders in adverse event monitoring/reporting and product recalls, they may be subject to penalties such as corrective actions, fines up to RMB 0.5 million, or five-year prohibition from engaging in cosmetic businesses.
Finally, the new regulation significantly increases administrative penalties for a variety of violations. for example, it imposes penalties of up to 15 to 30 times the illegal gains, a sharp uptick from 3-5 times the illegal gains under the current regulation. Moreover, the new regulation imposes personal liability on responsible corporate officers of an entity that violates the New Regulation. Such officers would be subject to fines up to five times his/her annual income from the non-compliant entity and lifetime debarment in serious cases.
Katherine Wang is a partner in Ropes & Gray’s life sciences group. (Edits/additions courtesy of TFL)