Tightened regulation to bolster confidence

Regulators' tightened grip over securities firms can buoy investor confidence and market stability, which will help to usher in more mid- to long-term capital inflows and boost market performance, said experts.

Information from the public domain shows that more than 260 administrative penalties have been issued to securities firms, their branches and practitioners in the first three quarters, covering over 50 brokerages. Around 60 penalties were handed down in September alone, hitting a monthly high for the year.

Top-tier players such as CITIC Securities, Huatai Securities and CSC Financial all appeared on the penalty list. TF Securities received 18 penalties, the highest tally in the sector.

Tian Lihui, professor of finance at Nankai University, interpreted the stern enforcement action as regulators' zero-tolerance stance, which is of strong warning value.

Regulators have targeted both the controlling shareholders that have abused power and the intermediaries accountable for failures in duty. This will cut off channels for improper benefit transfers. The penalties include maximum fines and lifetime market bans to "inflict real pain", he said.

The penalties have also reflected deeper structural flaws. Brokerage firms' headquarters often have comprehensive compliance rules, yet provincial branches, which serve as the second line of defense in the three-tier headquarters-branch-office structure, have long operated under loose oversight. In addition, marketing compensation has long been tied directly to new account openings, pushing frontline staff to seek compliance arbitrage under performance pressure, Tian said.

Zhao Ran, chief non-banking financial analyst at CSC Financial, said that retail brokerage and bond underwriting, the two traditional business pillars for securities firms, remain hotbeds of compliance lapses.

"Retail brokerage serves vast numbers of retail clients, creating vulnerabilities in account management, investor suitability assessments and staff conduct oversight. Bond underwriting demands rigorous due diligence. Inadequate reviews can hurt investors and damage broker reputation," he said.

This wave of penalties has been enforced amid the "teeth-and-thorns" financial oversight, which was initiated during a central meeting in October 2023. In March 2024, the China Securities Regulatory Commission, the country's top securities watchdog, released four policy documents to formalize this enforcement principle. The State Council has also underlined in the new "nine guidelines" released in April 2024 stricter supervision over broker corporate governance, employee conduct, brokerage services, wealth management and anti-money laundering.

Dong Zhongyun, chief economist at AVIC Securities, said that regulators are striking a balance between market vitality and integrity through a mix of stabilization and reform methods. Routine strict enforcement targets insider trading, market manipulation, malicious short selling and financial fraud to curb speculative excess. This will anchor market expectations in the short run while sustained inflows of long-term capital can be expected to reshape trading patterns and reduce volatility, he said.

Xu Ran, chief China financial analyst at Morgan Stanley, applauded China's recent tighter regulatory grip over market leverage, containing risks, significantly reducing shadow banking and hidden risks and reining in asset bubbles. All these will help remove obstacles for a stable market and lay solid foundations for a slow A-share bull, he said.

Wang Bin, assistant to the president at Industrial Securities, said the regulatory framework for high-quality capital market development reinforces long-term stability for A shares. Regulators push for a full-chain supervisory system to foster a market ecosystem with orderly survival of the fittest, while containing risks to bolster confidence among investors and stakeholders, he said.

shijing@chinadaily.com.cn