What happened

Shares of two big Chinese online brokerages fell sharply today after more bad regulatory news for the industry. Shares of Futu Holdings Ltd (NASDAQ:FUTU) traded nearly 16% down as of 1:55 p.m. EDT, while shares of Up Fintech Holding Ltd (NASDAQ:TIGR) were down nearly 18%.

So what

Earlier today, an official at the People's Bank of China (PBOC), China's central bank, said online brokerages would not be in compliance with soon-to-be passed laws if they do not have an official brokerage license in China.

"Cross-border online brokerages are driving in China without a driver's license. They're conducting illegal financial activities," Sun Tianqi, China's head of the Financial Stability Department of the PBOC, said Wednesday, according to a transcript of his speech.

The comments further complicate the regulatory environment for Futu and Up Fintech, two online brokerages that help Chinese citizens purchase foreign stocks online. In November, new rules in China will be implemented that regulate how online data is used. Futu and Up Fintech don't have domestic brokerage licenses but instead allow people to open accounts after they provide their personal data.

Red line with arrow going downward.

Image source: Getty Images.

Now what

The pending laws and comments from Tianqi are certainly threats to Futu and Up Fintech's business. More guidance will be needed from regulators in order for the two firms to figure out whether they are indeed out of compliance, and if so, what they need to do to get back into compliance. Chinese stocks often come under the crosshairs of regulators, which makes them much riskier.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.