(Yicai) Sept. 12 -- The Chinese interbank lending regulator is requesting securities firms to conduct self-examination to address a number of problems in the sector such as mixing proprietary trading, which is when the broker uses its own capital to trade financial instruments, with investment consulting to improve transparency and rein in shady practices.

The National Association of Financial Market Institutional Investors is urging securities companies to strictly isolate different business lines to prevent conflicts of interest and moral risks, it said yesterday.

Some brokerages, when providing investment consulting services to small and medium-sized banks, are blurring the lines with proprietary trading, the association said. This can lead to the securities companies’ controlling a large amount of funds, which might then be used to manipulate transactions, move profit between customers accounts or even transfer the profits to their own business.

The association has recently spoken with a number of major brokerages with large investment advisory divisions and is requesting them to conduct a thorough self-examination of their investment consultancy business, it said. They should report the results to the association within a specified period of time, and submit all investment advisory contracts. For brokerages which do not carry out a truthful self-examination, the association will take further measures depending on the situation.

When brokers advise on bond investments, their consultants and their fee collection for the service should be separate as per the agreements signed by both parties, Yicai learned from industry insiders.

However, some securities firms have mixed operations, and staff at self-operated businesses often provide investment advisory services. Some brokerages even lend accounts to customers, which is prone to various potential risks.

Investment advice has gradually evolved into "controlling customer transactions," making brokerages an actual investment decision-making power. The scale of some investment consulting businesses is often tens of billions of Chinese yuan, equivalent to billions of US dollars, or even hundreds of billions of yuan. Combined with bond trading, the scale of funds that some securities firms control is greater than that of some small and medium-sized banks.

For banks, it is impossible for each investment account to achieve the expected return, a banker at a joint-stock bank told Yicai. Brokerages may be using different means to transfer profits from accounts that should not make a profit to other accounts, which may involve internal trading and price manipulation. There may also be profit transfers between accounts, thereby helping banks cover up investment imbalances and losses, the banker said.

Soon, all financial institutions will be required to file their investment advisory contracts with the NAFMII, the watchdog said. More rules related to investment advisory business will be formulated to crack down on violations and maintain normal market operations, it added.

Editor: Kim Taylor