BEIJING - China's banking regulator has given small banks a 2026 deadline to stop selling wealth management products unless they have a separate wealth subsidiary in a bid to curb financial risks, three people with knowledge of the matter told Reuters.

A 2018 regulation and previous instructions had required banks to set up a wealth management subsidiary dedicated to such products, but the regulator did not give a timeline for when banks had to comply.

In addition to stipulating a deadline, the latest instruction also requires some small banks to reduce their wealth management business activities by the end of this year, the sources added.

Small regional lenders in Shandong, Guangdong and Zhejiang provinces are among banks that have been instructed to reduce their wealth management business by the National Financial Regulatory Administration (NFRA), the sources said.

The sources declined to be named as the instructions have yet to be made public.

The NFRA did not immediately reply to a Reuters request for comment.

The instruction is the latest effort by the government to rein in risks in the sprawling bank wealth management sector, which has been targeted as part of a regulatory crackdown on shadow banking activities over the past few years.

It would make banks standardise their wealth management businesses and to invest the funds into the capital markets in a compliant way.

They also aim to establish a clear separation between banks' wealth management operations and their other businesses to eliminate any implicit guarantee that these investment products would be bailed out by the banks if they perform poorly.

Since the 2018 regulation, China's major state-owned banks and large national commercial lenders established separate wealth management subsidiaries, but most smaller regional banks have lagged behind.

(Reporting by Beijing Newsroom; Editing by Jamie Freed and Miral Fahmy)