A 'Big Bang'in Finance Industry

Capital Markets Consolidation Act to remove all divides in the industry allowing only the strongest to survive

The government has been pushing for the legislation of the Capital Markets Consolidation Act in the past couple of years to foster the capital market in an effort to turn the financial industry into an industry that creates wealth, not like what it used to be, playing a supporting role as provider of funds to manufacturers. The bill finally got the parliamentary approval in early July. The government sees the need for enlarging the scale of the financial industry to the level of those in advanced countries, although its scale has grown large enough backed up by improved soundness and profit structure since the restructuring of the industry following the outbreak of the economic crisis in 1998.
The new capital market law is sure to reshape the capital market when it is enforced in 2009 and NewsWorld President-Publisher Elizabeth M. Oh found out about various changes and new issues expected to emerge under the new law through an interview with Dir.Gen. Lim Seung-tae of the Financial Policy Bureau of the Finance and Economy Ministry:
Question: What are the objectives and significance of the Capital Markets Consolidation Act designed to lead the development of the financial industry?
Answer: Basically, the international financial market has been going through tremendous changes since coming into the 21st century including the emergence of new players instead of depositors who led the market from its beginning while the world financial market has been turned into investment dominated and capital has been moving to direct financial markets from indirect financial markets. This is the largest characteristics of the change. New businesses will emerge depending on how these new players manage risks by means of new technologies and methods.
Many risky derivative products will coming into being at the international financial market and many assets that are used to buy U.S. treasury bonds will now be shifted to investment funds.
A number of countries with large foreign exchange reserves known for their dexterity for using these funds such as Middle East countries, CIS, China, and Singapore have become state-investment management organizations.
Now has come the time for us to take a ride on these trends. In a word, our country's financial institutions have seen its structure cleaned-up with their ROEs and profitability improving even better than those in advanced countries and their accumulation of wealth is clearly visible.
The national pension has some 182 trillion won in funds as of the end of last year and the foreign exchange reserves has been built up to $250 billion. Such accumulation of assets altogether with the assets managed by life insurance firms surpassing the 100 trillion won level, makes the country ready for a ride in the international financial trends.
In order to take full advantage of such chances, we need to improve the competitiveness of our capital market players. In this vein, the Korean government legislated Capital Market Consolidation Act to promote financial innovation and competition through advanced regulatory reform and stronger investor protection.
Q: What is the difference between the new capital market law and the Financial Industry Consolidation Law?
A: The government tried to legislate the financial industry consolidation law first integrating financial laws that regulate banks, securities and insurance industries but went ahead with the new capital market law first because of the criticism that it could be too radical.
The Capital Market Consolidation Act has four basic conceptual pillars. First, the broad definition of "financial investment products"has been introduced to expand the scope of permissible products for financial investment companies and the coverage of investor protection regulations. . Second, financial function of the same nature shall be governed by the same regulation, regardless of the financial institutions engaged in the transaction. Third, protection for investors have been made stronger by adopting advanced investor protection mechanism such as principle of suitability, know-your-customers-rule as well as strengthening the mechanism to prevent conflict of interests. Finally, the new law also makes it easier for the financial investemt services companies to expand business scopes by allowing integration of all financial investment services such as dealing, arranging, asset management, discretionary & non-discretionary advisory services and asset custodian management.
Now, financial institutions will build themselves up to expand their sizes or to handle niche markets under the new capital market law. Domestic financial firms should be ready for an unlimited competition with their foreign rivals. Foreign financial firms would have an upper hand at the beginning but domestic firms will be able to gain their competitiveness soon. For example, such financial products as ELS and ELW were imported from Hong Kong at the start, but now they have been virtually remade in Korea to earn more profits with their market shares increased.
Q: What are some of the tasks facing the financial industry with the conclusion of the Korea-U.S. free trade agreement?
A: The FTA with the U.S. will be a good opportunity for the development of the financial industry. The industry went through liberalization when the country joined the UR and OECD and thereafter it has been stronger by importing new financial products and techniques from advanced countries through FTAs.
To look at the effects more in detail, under the FTA, new financial services in support of corporate activities will be allowed under certain conditions, even across borders. It is an opportunity for fostering the financial industry to be a new growth engine as it will give the equal treatment to domestic firms in the government financial procurement, and the exchange of information and the creation of a consultation channel to solve mutual problems.
Q: Can you, please, explain the payment system issue which has been in the center of a heated argument?
A: The payment system has been an exclusive business of banks. But financial products and the development of business firms, securities firms have been able to find a room to take care of the business. The new capital market law will back it up with systems when it comes into force in 2009. In EU countries, the payment services is not limited to the financial institutions but consumers can transfer their funds at supermarkets and make remit small amount of money with cards.
Q: What strategies are there to make Korea a regional financial hub?
A: The most important thing to realize is that the government cannot do it alone but its role is to provide equipment, infrastructure and market forces will build the regional financial hub. Professional financial manpower should be supplied more than ever and the infrastructure should be refurbished. Systems should be able to set conditions for competition. Unfair and unsound financial institutions will be allowed to go out of business and the financial market will be able to achieve its objectives through competition. The government will show directions and build a frame for the market and take charge of supervision. The government will provide legal and systematic support to build a regional financial hub centered on the asset management area.
Q: Recently, the government disclosed a plan to have Korea Development Bank to continue to retain the control of Daewoo Securities and let it grow as a professional investment bank?
A: The decision was made so that KDB would create a synergy with the securities firm. Daewoo has enough characteristics in its operation to be an excellent IB and can bring synergy like an advanced financial organization with KDB and is may be close to an IB business model in advanced countries. KDB and Daewoo Securities will complement each other in operation. KDB has set up the Seoul IB Forum to strengthen its IB capacity with Seoul National University Professor Min sang-ki as chairman.
Q: What are things that a bank should do to be a strong one globally's and measures for idle funds flowing into the stock market after the new capital law getting parliamentary approval?
A: Of all global financial assets, bank deposits shared 42 percent in 1985, but in 2005, the share skidded to 25 percent, which forced banks to increase their income from non-banking sectors such as direct investment and they should try harder from now. Our banks would be unsuitable to be an IB, and therefore would try to play the role through its holding companies with cooperation between securities firms and banks expected to occur.
In the end, the new capital market law would not be a disadvantageous to banks. For example, banks take up around 90 percent of the OTC derivatives trading and they invest more than 30% of their assets into capital market related products. Banks will have a new momentum for change now that they have chances to operate the private banking business.
Q: There have been much public and investors'interest on the listing of life insurance companies on the stock market and what is the current status and plans?
A: Some of the life insurance firms are known to list their shares on the stock exchange sooner or later. The choice is up to life insurance firms as the system has been already prepared on April 2007.
Q: What does the new capital market mean to insurance firms viewed from their positions?
A: On the side of insurance firms, a company that does asset management well will win at the end. They have many long-term products and therefore they have much funds. In the past, they were forbidden to buy hedging products, but now they can manage those products in the country. nw

Director-General Lim Seung-tae of the Financial Policy Bureau of the Ministry of Finance and Economy.