China Warns Unlicensed Online Brokerages They are Breaking the Law

Oct 28, 2021

The New York-listed shares of Futu Holdings Ltd and UP Fintech Holdings were substantially lower after a Chinese central banker cautioned that online brokerages not regulated in China are behaving unlawfully if they service Chinese clients via the Internet.

"In China, cross-border online brokerages operate without a driver's license. They're involved in shady financial activities " Sun Tianqi, the chairman of the People's Bank of China's (PBOC) Financial Stability Department, stated in a speech.

Sun's statements, the first official comments following recent media stories exposing regulatory dangers confronting online brokers, sent Futu and UP Fintech shares plunging more than 20% in premarket activity on Thursday.

Futu and UP Fintech's stock had already fallen since Oct. 14, when the official People's Daily published an analysis on its website warning that the two companies face regulatory concerns when China's new personal data privacy law takes effect on Nov. 1.

After a spate of crackdowns targeting sectors ranging from technology to cryptocurrency and real estate, investors are fearful that the sector may be next in Beijing's regulatory crosshairs.

Investors should check to see if the Chinese government will prohibit Chinese citizens from opening an account with an offshore bank, and if they will be able to use that account to open a trading account with offshore brokers like Futu, according to Jefferies.

SUFFICIENT CAPITAL

Many Chinese securities firms have set up offshore subsidiaries to provide Hong Kong or US trading services to domestic individuals, and foreign brokers such as Interactive Brokers Group Inc accept mainland Chinese clients, according to Jefferies, so "we need to wait for more regulators' guidelines."

In a tweet on Thursday, Futu Chairman and CEO Hua Li stated that the company has business licenses in Hong Kong, has an excellent track record, sufficient liquidity, and "no bankruptcy worries."

According to an institutional investor in UP Fintech, the PBOC official's remark threatens to further erode foreign investors' faith in Chinese tech firms.

PBOC's Sun claimed that certain online brokerages with only foreign licenses serve only mainland Chinese investors, allowing them to trade U.S. and Hong Kong stocks, while speaking at the Bund Summit in Shanghai over the weekend.

Sun stated that mainland clients opened 80 percent of accounts at a Cayman Islands-registered brokerage, while mainland consumers opened 55 percent of accounts at another Hong Kong-registered brokerage.

Sun explained, "Financial licenses have national boundaries." "Illegal financial activity" is defined as "overseas institutions with only overseas licenses conducting business in mainland China."

Sun's address was transcribed and posted on the Finance 40 Forum's website, which organized the summit.

In its 2020 annual report, Futu, which has licenses in Hong Kong, Singapore, and the United States, stated that it largely serves the increasingly affluent Chinese community, with mainland Chinese citizens accounting for a substantial portion of its clients.

Futu claims it is not in the securities brokerage industry in China because it directs users and clients to register accounts and conduct transactions outside of the country, but there are regulatory concerns.