Improved investor protection in the Korean capital markets
2010/02/19 2 Comments
Two years ago when the world economy continued an upward trend and KOSPI roared ahead to an unprecedented level, the high-yield capital markets triggered a “fund boom” in Korea.
“I couldn’t bare my friends showing off their nearly-doubled account. They urged me to invest in funds before it gets too late and I rushed into a bank the next day.” Jang Jae-gyun, a university student said.
Looking back, most of investors at that time made their decision in haste without deep consideration. The majority put their money in funds just not to fall behind the trend, and only few knew exactly what they were investing on. The business environments had helped to fuel this trend ; promotion battle among financial institutions forced tellers to sell more financial products and subscribing a fund required only a few minutes due to simple process.
But now, situation has changed a lot. “Now it takes at least forty minutes to complete all the necessary procedure. We should carry out some paperworks in advance to figure out our customers’ investment propensity, and only after then we can recommend the best fund that suits their objective. Plus, we spend another few minutes to provide information about the fund itself,” said Kim Young-sim, a manager at Hana Bank in Yeoido.
Korean capital markets has gone through a lot of changes last year due to the implementation of the Capital Market and Financial Investment Services Act which came into effect on Feb. 4, 2009. The new law, which was initially enacted to boost the capital markets, brought huge reformation to financial regulations. Experts pick the most profound change as the strengthened protective measures for investors.
Following measures are used to reinforce investor protection in the new law : (i) supplying investors with sufficient information through disclosure system ; (ii) mandating principle of suitability in the regulation of investment solicitation; (iii) regulating unfairly solicited behaviour and investment advertisement.
In other words, now all the financial institutions – not just securities companies but also others including commercial banks and insurance companies – should let their customers make the decision at their own free will with sufficient and well-guided information.
If any financial company breaches one of those duties, it should pay off heavy price at the court. The provision in the new law estimates the amount of damages that the investor can claim, which means now it is financial companies’ responsibility to prove that their breaching the duty and the damages have no direct connection. This would act as a heavy burden for financial companies but experts speculate that it would play an effective role in protecting investors.
“As you know, for any kind of market, high trust among the participants is essential to its continuous development. Now, financial institutions have explicit mandates to provide information until their customers fully understand what they are investing on. Well, this increased burden for both firms and investors may stifle trades in short term, but I am sure it will help to gain trust from investors and give a momentum to our capital markets’ development in long term,” Kim Yong-Jae, a professor at Korea University, said.
Looking back the past one year, however, it had not been easy for those measures to settle in the markets. “I could barely sell any product in last February when the new law came into effect. The procedures were so complicated and we had hard time to get used to it. Besides, customers were reluctant to sit for an hour to go through all the necessary procedure,” Kim at Hana Bank said.
Yi Chang-hwa, a director at Korea Financial Investment Association, agreed. “When we first introduced the Investment Solicitation Standards to our members last year in order to meet the demand in the Capital Market Act, they all fell into disorder. Tellers in financial companies were in chaos while customers complained about the complicated and boring procedure.”
But they all admitted that the situation has gotten much better now. “Now most of customers understand the mandatory process. Also, as we got some know-how on how to deliver all the information effectively, I think customers are paying much attention than before,” Kim said. Yi also agreed that time solves everything. “It always takes some time to adapt to new ways. Although financial companies and investors had some break for a while, they know that our capital markets have a bright future ahead.”
There are some remaining tasks, though. “I think we need to revise the current process as some of them are impractical. For example, on one of the scoring sheet, there is a question asking how much one can hang on if he or she has to come up with a loss. Well, I have rarely seen someone checking over 20 percent as nobody wants to lose his or her money. But the customer still wants to invest on high risking products while the result of the sheet indicates that he shouldn’t,” she added.
Yi Chang-hwa, who takes in charge of setting the standard which applies to all financial institutions, said. “We fully understand the problems lying under the current procedure. We are now integrating suggestions of the industry, academic circles, and government institutions. We will come up with more applicable standard at least before June, this year.”
The new law has exercised huge deregulation to the capital markets in Korea. It has eliminated the limit of financial products that can be dealt in the markets and expanded the business scope of financial institutions. These full-scale changes are expected to provide chances for financial companies to come up with more creative financial products and let investors have more choices in which to put their money.
Along with these measures to develop the capital markets, the reinforced investor protection will give a momentum to those efforts by gaining public trust, according to experts. “Protecting investors is a prerequisite for capital markets’ sustainable development. It is very hopeful that we have had a rapid improvement in this area,” said Lee In-ho, a professor at Seoul National University.
By Nam Won-chul(firstname.lastname@example.org)