South Korea’s financial sector will begin a long-awaited “big bang” next week, with the enactment of a wide-ranging act considered Seoul’s answer to the deregulation drive that transformed the City of London two decades ago.
As part of its lofty ambition to turn Seoul into a large financial centre in Asia, the Korean government is trying to restructure the finance sector into clear areas – banking, insurance and investment – and encourage competition, consolidation and creativity.
Although a raft of reforms were instituted following the Asian financial crisis 10 years ago, these were concentrated largely on the banking sector.
The Capital Markets Integration Act, set to be ratified by the national assembly next week, is expected to transform the non-banking sector, leading to the emergence of one-stop investment houses or a “Korean Goldman Sachs”.
“This will have a very positive impact on the future growth of Korea’s capital markets,” said Jun Kwang-woo, Seoul’s ambassador for international finance and chairman of Deloitte Korea. “This could create more positive synergies between the banking and non-banking sectors, globalise our capital markets and raise our international competitiveness.”
Traditionally reliant on manufacturing, Korea is trying to move into more knowledge-based industries to stave off economic stagnation and the threat of competition from China.
According to the Korea Institute of Finance, the added value ratio of the financial services industry was 71 per cent last year, compared with only 22 per cent for manufacturing.
“The City of London offers many more clues as to the directions that Korea may wish to take,” Simon Cooper, chief executive of HSBC Korea, said at a recent conference. “The success of the UK’s financial reform has played a crucial role in reviving the British economy.”
The most significant part of the act, which will take effect in January 2009, is the shift from a positive list system of regulation – under which everything that is not allowed is prohibited – to a negative list, meaning financial groups can do anything that is not expressly banned.
“This does have the potential to move the Korean financial system to the next level of development,” said Meral Karasulu, the International Monetary Fund’s representative in Seoul. “A key change the law will bring is the move from a positive regulatory list to a negative one, creating room for new product development and innovation in general and potentially generating the competition needed for consolidation.”
The act will also loosen regulations for asset managers developing new products and allow them to introduce a wider variety of products, as well as permitting brokerages to provide customers with daily financial services.
Analysts say the act will also improve the quality of Korea’s oft-maligned regulatory system, which has long focused on compliance and assessed applications according to strict ratios. Now, regulators will now have to assess risk more actively.
“The regulators now take a silo approach to supervision but they will have to take a better, more functional approach in the future,” said one industry participant in Seoul.
Surveys of foreign investors regularly show that regulation together with the rigid labour market are the biggest challenges to doing business in Korea.Yoon Jeung-hyun, chairman of the Financial Supervisory Commission, admits that Korea’s financial industry needs a sea-change. “In order for Korea to leap forward and become a great market, a big bang in the financial industry will be necessary,” he said last week, adding that the trade agreement with the US could also help Korea’s financial sector to reach global standards.
Although the legislation is to be passed imminently, finance ministry officials overseeing the changes were “not ready to discuss” the new act, said spokeswoman Song Kyung-jin.
But some analysts are still cautious about whether this bang will really be as big as the government hopes, saying that more than just deregulation will be required to make Korea a big financial centre. “Personally, I am pessimistic about the success of this act,” said Rhee Nam-uh, head of equity research at Merrill Lynch in Seoul. “The city needs the legal framework, regulatory support, transparency, infrastructure, a supply of quality people and a market friendly environment.”