Moody's: Mainland Crackdown on Illegal Cross-border Securities Activities Has Moderate Impact on Rated HK Financial Institutions

Moody's stated that the China Securities Regulatory Commission, together with seven other ministries, is strengthening oversight of illegal cross-border securities, futures and fund business activities. The latest regulatory measures mainly target offshore online brokers that solicit mainland investors without regulatory approval. The credit impact on rated securities firms and banks in the Hong Kong SAR is moderate, while the impact on rated insurers is even more limited. However, should policies change further, the impact could become more significant.Among rated Hong Kong securities firms, subsidiaries of Chinese securities companies will face a moderate impact on business and revenue growth, as they have already stopped opening new brokerage accounts for mainland clients. These companies have complied with regulations introduced in 2023 that restrict individuals holding only mainland identity documents from opening new brokerage accounts with Hong Kong subsidiaries of Chinese securities firms. The 2023 regulatory changes have already slowed new business growth, suggesting limited additional downside from further policy tightening. Importantly, compliant channels such as the Qualified Domestic Institutional Investor (QDII) scheme, Southbound Stock Connect and the Cross-boundary Wealth Management Connect (WMC) remain unaffected.For rated securities subsidiaries of Chinese banks in Hong Kong, brokerage business accounts for less than 15% of total revenue for most players, limiting the overall impact. Other income sources - including investment banking and proprietary investment - can buffer declines in brokerage income from mainland clients.Uncertainty remains regarding the treatment of existing accounts. It is unclear whether securities firms will be required to gradually reduce assets under management (AUM) in accounts opened for mainland clients prior to the 2023 regulatory changes. Such ambiguity could lead to potential AUM reductions and affect business visibility, prompting the industry to adopt a more cautious operating approach.Rated Hong Kong banks may face moderate and indirect impacts on their wealth management business (WMB) due to tighter controls on cross-border investment accounts. This is because mainland-related wealth management activities operate within established regulatory frameworks, and banks benefit from broad customer bases and diversified WMB income streams.The impact is relatively more visible in certain client segments and brokerage- and trading-related revenue streams. For mass affluent mainland clients with relatively limited offshore assets, the main transmission channel could be greater obstacles in account opening and fund transfers, including retail customers who must travel to Hong Kong in person to open and activate investment accounts. This may result in some slowdown in new customer growth for banks and weaker conversion from account opening to AUM inflows. It may also dampen trading-oriented client activity, namely businesses that rely on clients using investment accounts for transactions and maintaining active fund balances. This could weigh on banks’ brokerage-related fee income, which had been a key driver of fee growth for many Hong Kong banks between 2024 and 2025. Nevertheless, such impacts are likely to be offset by more resilient contributions from higher-wealth client segments and income sources less dependent on trading activities.Policy-supported channels such as the Cross-boundary Wealth Management Connect should remain unaffected and continue to support account openings, fund inflows and fee income. In addition, clients with established offshore wealth are less constrained by funding requirements and should remain a relatively stable source of AUM inflows. Bancassurance will continue to be an important source of fee income and is expected to be more resilient.Moody's expects the short-term impact to be manageable, but warns that further policy changes would have more significant consequences. In recent years, mainland-related WMB has been a key growth driver for Hong Kong banks. Further tightening could slow growth momentum and shift business focus toward higher-quality offshore funding clients and established cross-border investment channels.Rated Hong Kong insurers may face limited direct impact from further tightening of capital controls, as the sale of insurance products to mainland clients operates under a more mature regulatory framework. The “in-person” requirement is a key feature, whereby sales and underwriting for mainland clients must be conducted in Hong Kong, with funding primarily sourced from offshore bank accounts.In addition, Hong Kong’s insurance industry has undergone multiple rounds of regulatory tightening since 2016, including restrictions on payment methods and caps on credit card transactions. As a result, insurers and intermediaries have largely moved away from business associated with illegal funding channels.Nevertheless, downside risks may emerge if stricter capital controls are imposed on cross-border sales. Such measures could be introduced if regulators identify cases of policies financed through illegal channels. Cross-border sales have been a key growth driver for Hong Kong insurers. Moody's estimates that such business accounts for about 40% of industry new business premiums, rising to 50% for leading players. Further tightening of capital controls or any policy changes would likely slow new business growth in Hong Kong and could increase the risk of policy surrenders for existing cross-border policies. (ad/da)