(Yicai Global) July 5 -- Chinese regulators have intensified their crackdown on the fintech sector. Draft regulations published by Shenzhen would force many firms to complete a transformation to be compliant.

Following in the footsteps of Xiamen, Guangdong and Shanghai, the Shenzhen Municipal Financial Service Office issued draft regulations that cover peer-to-peer online lending on Monday.

"Though we believe we are well-prepared for tighter regulatory policy, we still felt that we underestimated the intensity of regulatory scrutiny after we saw the full text of the documents," a director at a fintech firm in South China told Yicai Global.

The regulations unveiled in Shenzhen are more operational, detailed and strict than those released elsewhere, insiders told Yicai Global. Shenzhen's rules cover division of regulatory work, jurisdiction-based management and entry standards, they said.

Shenzhen's regulatory documents contain the most stringent requirements on jurisdiction-based management of custodian banks among existing local internet finance policies.

The documents require fintech firms doing business in Shenzhen to operate and registration there and have a local custodian, signaling that jurisdiction-based management will become a basic regulatory requirement in the fintech industry, said Yu Baicheng, director of Wdzj.com's research center.

The regulations say that the custodian banks used must have branches and higher-level business outlets in Shenzhen, meaning the rules are stricter than those unveiled by Shanghai, Yu said.

"Based on the rules, companies should operate in the place where they are registered," said Li Changguo, president of Yyfax.com. "This will make it easier to regulate enterprises."

Lending platforms that can't be contacted will not be able to get on the registration whitelist in the future, and those already on the list won't be able to register, said Zeng Guang, secretary-general of the Shenzhen Internet Finance Association.

Shenzhen's new rules also outline entry standards and impose conditions on online lenders.

Just like Shanghai and Guangdong, Shenzhen will require newly established online lending platforms to have a compliance statement issued by a law firm when they apply to register. Platforms that are already operational will need to get an audited report issued by an accounting firm with a securities and futures license.

"The requirement for audit reports and legal opinions is the most critical one," said Fang Song, head of the Guangzhou Internet Finance Association and president of Gzdai.com. "Lots of fintech platforms simply cannot pass an audit."

Most fintech platforms are facing two major problems, Fang said. One is misappropriation of funds and the resultant losses, which make it difficult to pass an audit. The other is large loans. Although regulations published last year prohibited online lenders from issuing large loans, they still exist.

For many platforms, whether they can successfully transform will determine their survival, Fang said.