(Yicai) May 25 -- China’s government has banned foreign brokerages from promoting their securities, futures, and fund services in the country, while the securities watchdog will penalize three firms for illegally giving Chinese mainland investors access to overseas stock trading.

Foreign brokers are also barred from providing services such as account opening, processing of trading orders, and fund transfers, according to a document jointly issued by the China Securities Regulatory Commission, the People's Bank of China, the State Administration of Foreign Exchange, and five other government agencies on May 22.

On the same day, the CSRC announced that Tiger Brokers, Futu Securities, and Longbridge Securities do not have licenses for operating securities brokerage services or margin financing services, but had been marketing and providing securities-related services within China for profit.

The authorities have set a two-year grace period, during which existing mainland clients of these brokers are permitted only to execute sell orders and withdraw their funds.

The CSRC intends to confiscate all illegal gains made by the three firms and related entities in China and overseas, and impose severe penalties. Tiger Brokers and Futu Securities said they will cooperate with the authorities.

“This new policy is a continuation and deepening of the previous special campaign to rectify illegal cross-border operations,” Zhao Ran, chief analyst for non-bank financials and forward-looking research at China Securities, told Yicai. “The logic has shifted from restricting new activities to rectifying existing issues, sending a clear signal to the market of a firm crackdown on illegal cross-border financial activities.”

Tiger Brokers said the fines and confiscation amounts to more than CNY400 million (USD59 million), and Chief Executive Officer Wu Tianhua was also warned and fined CNY1.25 million (USD183,965). Individual mainland clients account for about 10 percent of the firm's total client assets, it pointed out.

Futu Holdings will be fined CNY1.9 billion (USD279.6 million), while its founder and CEO Li Hua will be fined CNY1.25 million, the parent company of Futu Securities announced. Mainland clients with assets make up around 13 percent of its total client base.

Longbridge Securities has not yet disclosed its penalties.

Futu’s shares [NASDAQ: FUTU] plunged more than 27 percent to USD89.76 on May 22, while Tiger Brokers [NASDAQ: TIGR] tumbled over 25 percent to USD4.36.

On Dec. 30, 2022, the CSRC issued a notice requiring Futu Securities and Tiger Brokers to rectify their operations, noting that the pair conducted cross-border securities business targeting domestic investors without approval, which constitutes illegal securities business under the Securities Law and other relevant legislation and regulations.

Although the new regulations completely prohibit cross-border brokers from operating in China, the measures are relatively mild and reflect the principle of investor protection, industry professionals pointed out.

"Existing clients can sell their holdings independently within two years, rather than being forced to liquidate their positions, not only achieving the policy objective of prohibiting overseas transactions within the domestic market but also protecting investors' cross-border assets," a source at a Hong Kong brokerage said. “This shows that regulators aim to set rules rather than target investors.”

Editor: Martin Kadiev