The brokerage fines hit a new high, what changes will the industry ecology have?

Securities firms are facing a record number of penalty notices, with fines becoming more nuanced across various business lines. Under a series of stringent regulatory policies, the securities industry ecosystem may be on the cusp of new changes.

Since Wu Qing took office as the chairman of the China Securities Regulatory Commission (CSRC), "strong and strict regulation" has been fully manifested in the securities firm industry.

Data from Wind (Wangde) shows that as of May 21, the number of penalty notices issued by the regulatory authorities with securities firms as the subject of punishment reached 80, involving 26 securities firms. In comparison, there were only 20 during the same period last year.

According to statistics from Caijing, there have been significant changes in the penalty notices for securities firms this year. Firstly, penalties have become more frequent, with a substantial increase in the number of fines. Secondly, the subjects of punishment include top securities firms such as CICC, Guotai Junan, and Haitong Securities. Thirdly, the intensity of penalties has increased, with four securities firms being investigated this year.

Moreover, regulatory penalties have become more refined. Data indicates that most penalties are related to business operations, covering investment banking, asset management, brokerage, and other aspects. There are also a varying number of fines related to internal control compliance and information disclosure.

Under strict regulation, the survival of small and medium-sized securities firms may become more challenging. In the penalty notices for small and medium-sized securities firms, many are related to compliance and internal control. "The Matthew effect in the securities industry is already very obvious. The further away from the top, the fewer market opportunities there are. With fewer market opportunities, some small and medium-sized securities firms may relax control to compete for projects," a senior investment banking professional told Caijing.

In the context of strict regulation, new changes in the securities industry may be happening. On May 10, the CSRC issued the revised "Regulations on Strengthening the Supervision of Listed Securities Companies." It clearly requires listed securities companies to return to their roots and strive to be better and stronger with a more distinct people's stance, more advanced development concepts, stricter qualified risk control, and more standardized and transparent information disclosure, effectively playing the role of "leader" and "pioneer" in leading the industry's high-quality development.

Previously, on March 15, the CSRC issued the "Opinions on Strengthening the Supervision of Securities Companies and Public Fund Management and Accelerating the Construction of First-Class Investment Banks and Investment Institutions (Trial)," which clarified the goal of building first-class investment banks and investment institutions.

Under a series of regulatory policies, the development paths of top securities firms and small and medium-sized securities firms are becoming clearer. Top securities firms aim to grow and strengthen, building first-class investment banks, while small and medium-sized securities firms may seek differentiated development.Record-Breaking Number of Penalties

Few years have seen securities firms receive penalties as densely packed as in 2024.

On January 2nd, an announcement from the Beijing Securities Regulatory Bureau kicked off the penalties for securities firms in 2024. Galaxy Securities was subjected to administrative regulatory measures, including a warning letter, due to issues such as imprudent distribution access, flaws in the custodian's performance of duties, and inadequate branch management in the process of carrying out private fund product-related business.

On January 8th and January 12th, the China Securities Regulatory Commission (CSRC) issued a total of nine penalty notices, imposing administrative regulatory measures such as warning letters or regulatory talks on Guotai Junan, CICC, Dongxing Securities, Zhongde Securities, Wanhe Securities, and related practitioners.

The intense pace of penalties continued unabated. According to Wind data, with securities companies as the subject of penalties, as of May 21st, the regulatory authorities had issued a total of 80 penalty notices, far exceeding the same period in previous years. In January, there were 16 penalty notices, and a combined total of 15 for February and March. However, in April, the number of penalty notices rose to 25; since May, the number has already reached 24.

On May 14th alone, the Shanghai and Shenzhen Stock Exchanges, Jiangsu Securities Regulatory Bureau, and Jiangxi Securities Regulatory Bureau simultaneously announced penalties for six securities firms, namely Industrial Securities, CITIC Construction Investment, Everbright Securities, Huaxi Securities, Dongwu Securities, and Guohai Securities.

Top securities firms, known for their "prudence and stability," have all received penalty notices. Among the leading securities firms, CICC, Haitong Securities, Huatai Securities, Galaxy Securities, CITIC Construction Investment, Guotai Junan, and GF Securities all have penalty notices on record, with several firms receiving more than one notice.

Wind data shows that this year, Haitong Securities, as a corporate entity, has received nine penalty notices. In fact, Haitong Securities has consistently had the most penalty notices among the top securities firms in the past two years. At the same time, its performance has shown a downward trend. Wind data indicates that in the first quarter, Haitong Securities ranked seventh in industry revenue and twelfth in net profit, while the same indicators were fifth and fourth in the industry for the same period last year. Additionally, CICC has five, and Huatai Securities and Guotai Junan each have two penalty notices.

In terms of the severity of penalties, this year seems to be more stringent as well. Within less than half a year of 2024, four securities firms have already been investigated.

On April 12th, two top securities firms, CITIC Securities and Haitong Securities, announced simultaneously that they had received a "Notice of Investigation" from the CSRC. Both firms are under investigation by the CSRC for suspected illegal and regulatory violations in the process of transferring Zhonghe Titanium White's 2023 private placement shares in violation of restrictive regulations. Small and medium-sized securities firms, Dongwu Securities and Bohai Securities, have also been investigated successively.From the perspective of penalty types, the vast majority are issuance of warning letters, with some being public criticism, public condemnation, orders for rectification, etc. Penalties involve various businesses such as investment banking, brokerage, proprietary trading, and have become more stringent and refined. Among them, investment banking has always been a regulatory focus, with the main reasons for penalties including failure to perform due diligence, failure to report and disclose as required, inadequate compliance management mechanisms, insufficient effectiveness, and imperfect risk control mechanisms for clean business practices. Both brokerage and asset management businesses have also received a varying number of penalties. Sub-sectors such as two-way financing, equity pledge, over-the-counter derivatives, proprietary investment, and other businesses have all received penalty notices.

Different from the past, this year, the China Securities Regulatory Commission (CSRC) has significantly increased its crackdown on securities practitioners' violations of stock trading rules. In the first quarter of this year alone, over a hundred securities practitioners were penalized for violating trading securities regulations.

At the beginning of this year, the China Securities Association issued a notice to all securities companies titled "Notice on Seeking Opinions on Further Clarifying the Assessment Indicators for the Practice of Securities Company Culture Construction." It adjusted nine key focus areas and two bonus indicators, clarifying that employees' violations of securities trading, personal social media usage, and clean business practices of securities personnel will affect the assessment results of cultural practice and will be directly linked to the classification evaluation of securities firms.

Small and medium-sized securities firms face survival challenges.

Overall, leading securities firms receive more penalty notices. However, in terms of the severity of penalties, small and medium-sized securities firms may be more seriously affected. In the first half of this year, Dongwu Securities and Bohai Securities were successively investigated by the CSRC.

On April 16, Dongwu Securities announced that it was suspected of not performing due diligence in the non-public offering of stocks for Gome Communications and Zi Xin Pharmaceutical (delisted), and on April 8, the CSRC initiated an investigation into Dongwu Securities according to relevant regulations.

The penalties for Dongwu Securities did not stop there. On May 14, Dongwu Securities was publicly criticized by the Shenzhen Stock Exchange for not performing due diligence in the 2021 private placement of corporate bonds for Jingtong Ling, and there were issues such as incomplete working papers.

The first-quarter report for 2024 showed that Dongwu Securities achieved a revenue of 2.225 billion yuan, a decrease of 1.31% year-on-year. The net profit attributable to shareholders of the listed company was 456 million yuan, a decrease of 21.81% year-on-year.

Subsequently, on May 14, another small and medium-sized securities firm, Bohai Securities, announced that it was suspected of illegal and irregular financial advisory business. According to relevant regulations, on April 24, the CSRC decided to initiate an investigation into Bohai Securities.It is worth noting that Bohai Securities is advancing its IPO, and this investigation may impact its listing process. Bohai Securities is a comprehensive securities company registered in Tianjin, which was officially restructured into a joint-stock limited company in July 2008. It began IPO listing guidance as early as 2016 and received feedback from the China Securities Regulatory Commission (CSRC) on May 20, 2022.

Unlike other securities firms, Bohai Securities' largest source of operating income comes from proprietary trading. Some securities industry insiders told Caijing that small and medium-sized securities firms tend to be more aggressive in proprietary trading, leading to greater business fluctuations. With proprietary trading as its primary source of income, Bohai Securities' performance may be unstable. In 2023, Bohai Securities was rated at a B level.

Furthermore, Huaxiang Securities was suspected of irregularities in its sponsorship of the non-public offering of Jinling Tong's shares in 2019, and the Jiangsu Securities Regulatory Bureau suspended its sponsorship business qualification from April 28, 2024, to October 27, 2024.

Regarding the impact of the suspension of sponsorship business, Huaxiang Securities stated that it preliminarily estimated that the company's business income related to sponsorship business qualifications in 2023 would be about 35 million yuan. The impact of this event on the company's operations in 2024 and subsequent years is uncertain.

In fact, Huaxiang Securities had previously been penalized for its investment banking business. In September 2023, due to insufficient independence in internal controls, quality control department executives serving as sponsors for IPO projects and participating in quality control reviews, and issues where internal control opinions were not responded to, not implemented, or modified without internal core approval before being submitted externally, the CSRC took administrative regulatory measures to order corrections and issued warning letters to responsible persons.

The first-quarter report shows that Huaxiang Securities achieved a business income of 648 million yuan in the first quarter of this year, a decrease of 42.55% year-on-year. The net profit attributable to shareholders of the listed company was 126 million yuan, a decrease of 68.60% year-on-year. It experienced declines in brokerage business, investment banking business, asset management business, and proprietary trading.

In addition, the areas in which small and medium-sized securities firms are penalized also include asset management and proprietary trading. The reasons for the penalties often focus on the prudence of business operations. In fact, under strong regulatory oversight, the situation faced by small and medium-sized securities firms will be more difficult.

Some industry insiders believe that under the increasingly obvious head effect in the securities industry, frequently penalized securities firms face more restrictions and passivity in conducting business. For example, they face difficulties in securing investment banking business, local restrictions on brokerage business, and instability in asset management and proprietary trading, putting immense pressure on the survival of small and medium-sized securities firms.

Industry changes under strong regulatory oversight

Under a series of strong regulatory policies and measures, the securities industry may face new changes.On May 10th, the China Securities Regulatory Commission (CSRC) released the revised "Regulations on Strengthening the Supervision of Listed Securities Companies." The regulations aim to enhance supervision and leverage the leading and exemplary role of listed securities companies in promoting high-quality development of the industry.

The CSRC stated that the revision emphasizes goal and problem orientation, explicitly requiring listed securities companies to adopt a clearer people-oriented stance, more advanced development concepts, stricter qualified risk control, and more standardized and transparent information disclosure. They are expected to strive to return to their roots, excel and strengthen, and effectively take on the role of "pioneers" and "vanguard" in leading the industry's high-quality development.

"The implementation of these 'Regulations' will be beneficial in urging and guiding the securities industry to fully practice the path of financial development with Chinese characteristics, fully implement the new 'Nine National Policies,' and comprehensively enhance the level of service to the real economy and investors," the CSRC said.

In fact, the regulatory direction of the securities industry has already changed at the beginning of the tenure of the new CSRC chairman. On February 7th, Wu Qing officially became the new chairman of the CSRC. Known for leading the disposal of several securities firms with exposed operational risks, Wu Qing has been dubbed the "securities butcher" by the industry. To date, Wu Qing has been in office for just over a hundred days. However, in this short period, the CSRC has introduced a series of policies.

In March, the regulatory authorities released the new concept of "Two Strongs and Two Stricts" (strengthening foundations and strict supervision and management). On March 15th, the CSRC published four policy documents, including the "Opinions on Strictly Controlling the Issuance and Listing Access to Improve the Quality of Listed Companies from the Source (Trial)"; on the same day, the CSRC implemented the "Regulations on the On-site Inspection of First-time Publicly Offered Enterprises" and revised the "Regulations on the Supervision of Guidance for the First Public Offering and Listing of Stocks."

On April 12th, the State Council issued the "Several Opinions on Strengthening Supervision, Preventing Risks, and Promoting High-Quality Development of the Capital Market" (new "Nine National Policies"), and the CSRC introduced a 1+N regulatory policy in coordination.

When interpreting the new Nine National Policies, Wu Qing mentioned "strong supervision," stating that a comprehensive and three-dimensional capital market supervision system will be established, fully implementing supervision with "teeth and thorns," and with clear edges and corners. Institutional supervision should promote a return to the roots, excel and strengthen, further solidify the "gatekeeper" responsibility, and guide various industry institutions such as securities, futures, and funds to correct their business philosophy, improve compliance levels, professional service capabilities, and core competitiveness.

On April 19th, the CSRC designated the release of the "Regulations on the Management of Securities Trading Costs of Publicly Raised Securities Investment Funds"; on April 26th, the CSRC publicly solicited opinions on the "Regulations on the Supervision of Securities Regulatory System Retirees' Shareholding in Prospective Listed Companies (Trial)"; on April 30th, the Shanghai and Shenzhen stock exchanges released several business rules, including the "Stock Issuance and Listing Review Rules."

On May 15th, the CSRC disclosed the law enforcement situation for 2023 and clarified the focus of law enforcement work for 2024. The CSRC highlighted the intensity of the regulatory stance with four "close monitorings": first, closely monitoring the "key minority," focusing on eradicating capital market "cancer" such as fraudulent issuance and financial fraud, and promoting the improvement of the quality of listed companies; second, closely monitoring the lack of diligence and failure to fulfill responsibilities, pressing and solidifying the "gatekeeper" responsibility, and urging and guiding intermediary institutions to improve the quality of their practice; third, closely monitoring "collusion inside and outside," "embezzlement," and "repeat offenders," maintaining a high-pressure law enforcement stance against violations such as illegal reduction of holdings, market manipulation, and insider trading, actively creating a fair, transparent, and predictable trading environment; fourth, closely monitoring various fields such as bonds, private equity, and futures, resolutely taking a stand against illegal activities, leaving no dark or blind spots in financial regulatory law enforcement.

On the same day, Wu Qing emphasized the need to accelerate the construction of an integrated anti-counterfeiting and anti-fraud system in the capital market, further enhancing the efficiency of the connection between administrative and criminal enforcement. The CSRC's law enforcement focus for 2024 is: first, to strengthen the discovery of clues and increase the application of technology in regulation; second, to strictly investigate major cases; third, to enhance law enforcement efficiency; fourth, to continue to deepen cooperation; and fifth, to focus on both punishment and prevention.Through a series of policy introductions and public statements, "strong regulation, strict supervision" has become a consensus, and the future development path of securities firms is gradually becoming clear.

The New National Nine Articles and relevant documents from the China Securities Regulatory Commission (CSRC) emphasize that securities firms should prioritize functionality, with the industry moving towards a functional, intensive, specialized, and characteristic development model. Encouragement is given to the mergers and acquisitions of leading firms, which will further enhance industry concentration, while the trend of differentiation among small and medium-sized institutions becomes more pronounced.

Regulatory authorities have repeatedly expressed public support for leading securities firms to grow stronger through mergers and acquisitions. On March 15th, the CSRC issued the "Opinions on Strengthening the Regulation of Securities Firms and Public Fund Management Companies to Accelerate the Construction of First-Class Investment Banks and Investment Institutions (Trial)", which clearly outlined the goal of building first-class investment banks and investment institutions. The aim is to promote the formation of about 10 high-quality leading institutions to lead the industry's high-quality development trend within about 5 years; by 2035, to form 2 to 3 investment banks and investment institutions with international competitiveness and market leadership.

Leading securities firms can grow stronger through business innovation, mergers and acquisitions, while small and medium-sized securities firms need to find their positioning and achieve characteristic and differentiated development.

In fact, some small and medium-sized securities firms are also optimizing through mergers. For example, Guolian Securities' acquisition of Minsheng Securities, and Zheshang Securities' acquisition of Guodu Securities, may significantly enhance their market competitiveness after the mergers are completed.