BEIJING (Reuters) - China's government has approved a sweeping plan to clean up the country's online financial sector, according to sources with direct knowledge of the matter, including rules to limit the activities of P2P lending firms, the source of recent fraud scandals.

The government plan, which was drafted by China's central bank, follows a mid-April videoconference with 14 ministries and regulators organised by the State Council, the country's Cabinet, which approved the plan document seen by the sources.

The plan outlines stricter rules for peer-to-peer (P2P) platforms, where lending increased 300 per cent last year to 440 billion yuan, according to Citigroup research, forbidding them from holding their clients' capital in house.

Instead, client funds must be deposited with a qualified third-party banking institution and kept separate from a P2P platform's own corporate funds, the plan said, while firms must also set up "firewalls" to manage transactions with affiliates.

In February, the authorities arrested 21 officials of Ezubao, once China's biggest P2P lending platform, which collected US$7.6 billion in less than two years from more than 900,000 investors.

Ezubao used savvy marketing, authorities said, to fund "a complete Ponzi scheme", that used investor funds to support a lavish lifestyle for company executives.

Internet lending has made headlines not just in China recently, with the US Department of Justice opening an investigation into San Francisco-based Lending Club Corp. this week after the online lender admitted it had falsified documentation when selling a package of loans.

China's State Council is urging the 14 ministries to work together and share more information to clean up the online finance sector, according to the same sources.

The government is also calling for the establishment of a centralised registration system for internet financial products and a unified platform for internet bank accounts.

The plan restricts the activities that online financial platforms will be allowed to undertake without a licence, including raising cash to fund real estate projects or engage in financial services such as asset management.

It also creates additional responsibilities, such as a requirement to match a client's risk profile to the investment products they sell.

The plan also forbids false advertising of financial products, and prohibits non-financial companies from registering names including "finance", "asset management", "P2P","payments", "fund", and "trading exchange".

An inter-government body led by the central bank is also being set up, with representatives from the banking, securities and insurance regulators, along with the State Administration for Industry and Commerce and Ministry of Housing and Urban-Rural Development.

The plan calls for those ministries and departments to complete their field investigations by July and complete a sector-wide clean-up by November. The State Council intends to issue a report by March, 2017.

China's central bank and State Council did not immediately respond to requests for comment.

The contents of the plan document also appeared on social media in China on Friday, and follows earlier reports in Chinese media about the plan.