Hefty penalties from China's securities regulator for operating without necessary licenses remove a long-running overhang for the online brokerages

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Key Takeaways:

  • Futu and UP Fintech have been fined a combined $331 million for offering unlicensed cross-border stock trading services for Chinese customers
  • While the companies will have to wind down their original China services, the removal of a major regulatory overhang will allow them to focus on their international business

For years, regulatory uncertainty in their original China market has hung over Futu Holdings Ltd. (NASDAQ:FUTU) and UP Fintech Holding Ltd. (NASDAQ:TIGR) like a menacing cloud. Now, the storm has finally broken for the pair of brokerages that started out offering cross-border stock trading services for Chinese investors.

The aftermath of the storm wasn't pretty, costing both companies hefty sums as they were ordered to wind down their original China business. But there's also a bright side to the story, as Futu and UP Fintech can finally move on, focusing on international expansion efforts that were born out of necessity but are paying off nicely.

Last Friday, Futu and UP Fintech disclosed that the China Securities Regulatory Commission (CSRC) hit them with substantial penalties for running unlicensed cross-border securities operations within China. For Futu, the regulator proposed a fine and confiscation of illegal gains, which together total 1.85 billion yuan ($271 million). The company's founder and CEO, Hua Li, who also uses the English name Leaf, also faces a personal fine. UP Fintech must cough up 411.2 million yuan, with a similar additional reprimand for its CEO, Wu Tianhua.

The immediate market reaction was swift and brutal, with shares in both companies plunging more than 25% following their announcements. It's not hard to see why investors punished them. At first glance, the CSRC penalties alone look like a heavy financial blow to the brokerages, amounting to more than 9% of their annual revenue. Both companies will also lose a portion of their revenue bases as they shut their remaining China-based operations.

But the regulator's action brings closure to a saga that has been lingering for years, clearing the path for both companies to move forward. Furthermore, some may argue the Chinese authorities have been surprisingly lenient in their handling of the case.

Trouble signs

The first trouble sign came in 2021, when an official from China's central bank mentioned that unlicensed online brokerages were operating illegally, without specifically naming Futu and UP Fintech, the latter better known in China as Tiger Brokers. The CSRC weighed in with a similar opinion in late 2022, and ordered the pair to stop accepting new Mainland clients but stopped short of demanding an immediate shutdown of existing accounts. While harsh, that step effectively gave Futu and UP Fintech a multi-year grace period for shutting their cross-border trading services for China-based customers.

That approach gave Futu and UP Fintech plenty of time to diversify away from the Chinese market. They have aggressively pivoted to other markets, securing licenses and building massive user bases in international hubs like Singapore and Hong Kong. As a result, China accounted for just 13% of Futu's total funded accounts at the end of the first quarter and about 10% of UP Fintech's total client assets at the end of 2025.

Had Beijing forced an immediate shutdown in 2021 or 2022, the companies could well have collapsed. Instead, with more than three years to figure out a "Plan B," they are flourishing now. Revenue for Futu, now based in Hong Kong, surged nearly 68% last year to HK$22.8 billion ($2.94 billion), and its net profit doubled to HK$11.3 billion, fueled by new customer additions in Hong Kong and Malaysia. UP Fintech's revenue jumped 56% to $612.1 million. Its net profit for the year soared by an even stronger 181% to $170.9 million on the back of explosive user growth in Australia, New Zealand and Hong Kong and client asset expansion in Singapore, which is now the company's home.

The CSRC penalties will hurt both companies in the short term, but the pain will be a one-time hit and won't break them. Instead, with the removal of the agonizing, multi-year regulatory overhang, Futu and UP Fintech can speed up their international expansion without worrying about any Beijing action holding them back.

State-directed consolidation

The removal of two of the few private-sector players from China's brokerage landscape comes as the industry undergoes a state-directed consolidation. In the latest step, Orient Securities (3958.HK) finalized a plan to merge with Shanghai Securities, both of which are backed by the Shanghai government. That marriage came not long after two even larger players, Guotai Junan Securities and Haitong Securities, merged to form Guotai Haitong Securities (2611.HK).

Futu and UP Fintech never offered trading in Shanghai- and Shenzhen-listed stocks, like all of the other Chinese brokerages. Instead, they tried to carve out a niche by initially offering trading in U.S. and Hong Kong stocks for China-based investors, before expanding to offering stocks from other global markets as well.

Institutions and wealthy investors in China have a strong appetite for global diversification, and Beijing is addressing this on its own terms. Regulators have recently expanded outbound investment quotas via the Qualified Domestic Institutional Investor (QDII) program by $5.3 billion, steering more than half of that newly approved offshore trading capacity directly to domestic state-owned securities firms and fund managers. This will enable the government to satisfy domestic demand for foreign assets while making sure those investment activities are safely funneled through state-monitored channels.

After establishing themselves as legitimate international forces, Futu and UP Fintech probably have no problem leaving the Chinese market to state-owned institutions. And with the regulatory ghost that has haunted them for years finally laid to rest, investors can stop valuing these companies as endangered Chinese entities and start reassessing them as lean, global digital brokerages.

After the latest selloff, Futu shares trade at a price-to-earnings (P/E) ratio of 8.8, more or less on par with 8 for Orient Securities and higher than 6.6 for Guotai Haitong Securities. The multiple for UP fintech is lower, at 4.8. Notably, all of those multiples are well below the 36 for both U.S. discount brokerages Robinhood Markets (NASDAQ:HOOD) and Interactive Brokers (NASDAQ:IBKR). That seems to show that Futu and UP Fintech shares could have some upside if they can keep posting strong growth even after the loss of their China business.

After all, it seems that not all penalties are the same. For Futu and UP Fintech, the CSRC action led to wild turbulence for their share prices. But after weathering that, the companies may be on a much more stable growth trajectory.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.