China's cross-border securities brokerage sector is undergoing a sweeping overhaul as regulators move to eliminate illegal transactions and place the industry on a more compliant and transparent development track, analysts said.

This comes after authorities unveiled a tougher rectification campaign and disclosed severe penalties against three major offshore brokerages, with people knowledgeable of the matter saying the move is aimed at maintaining market order and protecting investors' rights, instead of tightening cross-border capital flows.

Eight Chinese government departments, led by the China Securities Regulatory Commission, had issued an implementation plan to eradicate illegal cross-border securities, futures and fund business activities within two years, the CSRC said on Friday.

Under the plan, overseas institutions will be prohibited from conducting marketing and client solicitation activities, or providing account opening, trade execution and fund transfer services related to securities, futures and fund businesses in the Chinese mainland.

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.

The moves came in as some offshore brokerages — without licensing from mainland regulators — have illegally 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. However, some firms have continued expanding mainland business through fake existing client certifications, highlighting the need for a thorough crackdown.

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

Zhao Ran, chief analyst for non-bank financial institutions at China Securities, said the crackdown has upgraded from restricting new illegal business to eliminating both new and existing illegal businesses, and will "fundamentally reshuffle" the cross-border brokerage business landscape.

The crackdown will not affect the legal channels for overseas investment, as mainland investors are encouraged to invest overseas through Stock Connect, the Qualified Domestic Institutional Investor program and Cross-boundary Wealth Management Connect, according to the plan.

As a move to implement the campaign, the CSRC disclosed on Friday planned administrative penalties against relevant offshore entities and domestic affiliates of Tiger Brokers (NZ), Futu Securities International (Hong Kong) and Longbridge Securities (Hong Kong) for illegally operating securities businesses onshore.

Futu Holdings — Futu Securities International's parent company — faces confiscation of illegal gains and fines totaling approximately 1.85 billion yuan ($273 million). Penalty and confiscation against UP Fintech Holding, Tiger Brokers' parent company, total approximately 411 million yuan.

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.

Liu Xinqi, an analyst at Guotai Haitong Securities, said the campaign would benefit leading brokerages with compliant international business operations, adding that the overall impact on Futu Holdings should be manageable, with mainland clients accounting for only 13 percent of its funded accounts by the end of the first quarter.