China targets offshore operations of brokerages in crackdown on pay loopholes, corruption

China's securities regulator and industry body are intensifying efforts to curb pay loopholes and corruption in brokerage operations, extending their anti-corruption oversight to overseas activities for the first time. The Securities Association of China recently circulated a revised draft of its "clean practices" rules, which will be reviewed by brokerages by September 29, according to industry sources.

This marks a significant expansion of Beijing's regulatory reach into the offshore operations of financial institutions, a sector long considered opaque and prone to illicit transfers and kickbacks.

Under the proposed rules, brokerages must establish mechanisms to recover bonuses and performance pay from employees who violate ethical standards or regulatory rules. They will also be required to submit annual integrity management reports for board review. To promote compliance, regulators are implementing incentives that reward employees who identify improper benefit transfers or major risks with priority promotions and honors.

The crackdown follows a series of previous penalties imposed by the China Securities Regulatory Commission (CSRC) on brokerages for regulatory breaches and illicit cross-border activities, as part of the regulator's broader effort to safeguard the stability of China's capital markets. The latest overhaul targets two additional areas of risk: innovation and digital operations.

Broader firms will be required to conduct integrity risk assessments before launching new products and cannot use algorithm design or system access to gain improper benefits through digital operations.

Beijing is pushing brokerages to improve their international competitiveness as part of broader market opening initiatives. CSRC vice-chairman Li Chao stated at a September 10 State Council briefing that the regulator would accelerate the development of "first-class investment banks and institutions" with stronger governance and professional capabilities, while also fostering a sound industry culture and supporting brokerages in tapping both domestic and overseas markets.

The tightened regulatory scrutiny could directly affect Chinese brokerages operating in Hong Kong, including major players such as CICC, Citic Securities International, and Huatai International, which dominate the city's equity and debt underwriting markets.