China is tightening its crackdown on overseas brokerages illegally providing services to onshore investors, with regulators aiming to eradicate such activities within two years while moving to penalize three major offshore brokerages for illegal cross-border securities business activities.

The China Securities Regulatory Commission said on Friday that eight government departments, including the CSRC, the Ministry of Industry and Information Technology, the Ministry of Public Security, and the People's Bank of China, had jointly issued an implementation plan to comprehensively tackle illegal cross-border securities, futures, and fund business activities.

The plan, aimed at better protecting investors' rights and maintaining market order, seeks to "resolutely eradicate illegal activities while clearing existing business in a smooth manner" through a two-year campaign, the CSRC said.

Under the plan, overseas institutions will be prohibited from conducting marketing and client solicitation activities, providing account opening, trade execution and fund transfer services related to securities, futures, and fund businesses in the Chinese mainland. Domestic entities are also banned from assisting such illegal operations.

For existing accounts, regulators will adopt phased rectification measures during the two-year transition period, during which overseas brokerages will be barred from providing services related to new purchases or fund deposits for onshore investors, while only sell orders and fund withdrawals will be allowed.

After the two-year period, overseas institutions must fully shut down mainland-facing websites, trading software, and related services. The starting date of the two-year transition period will be subject to announcements issued by the relevant securities firms.

As a move to implement the campaign, the CSRC said on Friday that it has launched investigations into the offshore entities and related domestic affiliates of Tiger Brokers, Futu Securities International, and Longbridge Securities for illegally operating securities businesses onshore, and plans to impose administrative penalties in accordance with the law.

The regulator said it plans to confiscate all illegal gains from the firms and impose severe penalties in accordance with the law. Market sources said the three brokerages account for the largest share of the illegal cross-border brokerage market and that the penalties are expected to serve as a strong deterrent.

"The CSRC will severely punish illegal institutions, firmly curb risks from illegal cross-border financial activities, and effectively protect investor's assets," the commission said.

People close to the matter said the latest crackdown will not affect the legal channels for overseas investment, as mainland investors can still invest overseas through legal channels such as Stock Connect, the Qualified Domestic Institutional Investor program, and Cross-boundary Wealth Management Connect.

They added that the phased suspension arrangement is designed to allow investors sufficient time to handle existing accounts and assets, while the plan does not restrict offshore institutions from providing services to mainland residents located overseas. The overall impact on the Hong Kong stock market is expected to be manageable.

The moves came in as some offshore brokerages — without approval from mainland regulators — have provided mainland investors with services for trading US and Hong Kong stocks. Investors using such illegal channels for overseas investments may face difficulties obtaining adequate legal protection or remedies in the event of disputes or losses.

On Dec 30, 2022, the CSRC clarified the illegal nature of such activities and banned offshore brokerages from soliciting mainland investors, opening new mainland accounts or expanding new mainland business. The latest action plan further upgrades the crackdown by extending rectification measures to existing businesses.