China Regulator Finds Futu and Up Fintech in Breach of Laws

The Chinese securities regulator recently announced that two online brokers listed on the Nasdaq had broken the country's laws by allowing mainland customers to make trades across borders. This has caused worries that the Chinese government is not done with its efforts to regulate private businesses.

On Friday morning in New York, the American depositary receipts of Up Fintech Holding Ltd. (also known as Tiger Brokers) and Futu Holdings Ltd. experienced a sharp decline of around 20% following the release of a statement from the China Securities Regulatory Commission that mentioned both companies.

The stock price of Futu has decreased by 31.48%.

Up Fintech declared in an announcement that it will work in tandem with the CSRC and take all necessary steps to abide by Chinese laws and regulations. When asked for a response, Up Fintech did not provide an immediate reply.

Futu, which has been listed in the United States since 2019, had been making preparations to add a listing in Hong Kong. However, on Thursday, the company suddenly put a halt to the plan, just one day before its intended trading debut. They stated that they were in the process of clarifying certain matters with the Hong Kong Stock Exchange.

Up Fintech and Futu are two popular retail-trading apps that are comparable to Robinhood Markets Inc. These apps are used by people in Asia to buy and sell stocks and options from major exchanges in the U.S., Hong Kong, and other countries. Tencent Holdings Ltd., a Chinese internet giant, is a strategic investor in Futu.

Despite the fact that China has stringent capital regulations, Chinese citizens are able to open bank accounts in Hong Kong and transfer up to $50,000 annually abroad. Additionally, they have the ability to establish brokerage accounts in the city to purchase and sell foreign stocks. Up Fintech mentioned in its most recent annual report that its users and customers were "typically knowledgeable Chinese investors living both inside and outside of China."

The China Securities Regulatory Commission (CSRC) recently declared that the practice of online brokers providing offshore securities-trading services to customers in mainland China is not in accordance with the nation's laws and regulations. In late 2021, CSRC officials held talks with the senior executives of Futu and Up Fintech, informing them of the need to comply with the relevant laws.

The regulator has mandated that Futu and Up Fintech cease taking on or attempting to acquire new domestic customers, as they are not permitted to open accounts.

The China Securities Regulatory Commission (CSRC) announced its intention to send personnel to Futu and Up Fintech to conduct on-site inspections. The CSRC stated that they will supervise and encourage the companies to make necessary changes, and take additional regulatory action depending on the results of the rectification.

In October 2021, Chinese state media accused Futu and Up Fintech of disregarding China's securities and other regulations. This was followed by a senior official from the People's Bank of China who declared that cross-border online brokerages in mainland China were operating without authorization, leading to a decrease in their American Depository Receipts (ADRs).

In the past two years, Chinese regulators have taken a hard stance on many quickly expanding businesses. This has resulted in a sharp decrease in the stock prices of Chinese internet-platform companies, private-tutoring firms, and other businesses. However, in recent months, Beijing has indicated that it is softening its regulatory approach and providing more assistance to private-sector enterprises.