This is the third in a monthly series contributed by executive members of the Financial Supervisory Service to address key ongoing financial issues. ― Ed.

The weather forecasts recently said that Korea would suffer from a severe drought this summer, with a heat wave hitting the country earlier than usual. In July when the summer heat wave gets into full swing, the regulatory system to prevent unfair practices in Korean capital markets is set to undergo a paradigm shift.


A new regulatory regime will be implemented to ban trade practices that are disruptive to financial markets. This will mark the culmination of a governmental endeavor to root out stock price manipulation and other unfair practices through a package of measures announced in April 2013.

Generally, the capital markets play two major roles; one as a financing channel for listed companies through the issuance of securities, and the other as a place of wealth creation for investors. Thus, it is vital that the markets operate in a sound and transparent manner to ensure a constant influx of investors to drive cash flows. The problem is, however, that some market participants in pursuit of huge short-term profits artificially influence the markets to cause price distortions, or engage in transactions by using important information on a listed company that is not made available to the public. These unfair practices, once pervasive, risk degrading the capital markets, and pushing honest and innocent investors out to the point where the markets will not be able to function normally.

Over the years, the advent of new financial products with finance-related IT advances has led to diverse types of misbehavior that have disturbed the market order. The stark reality that the existing regulations cannot tackle such irregularities makes it hard to ensure the integrity of the capital markets.

Against this backdrop, the new regime is intended to grant Korea’s financial authorities the power to seize ill-gotten gains and charge punitive fines in cases of misconduct that erode the soundness of the markets, but do not meet the existing criteria for unfair practices.

Financial authorities in major countries such as the United States, the United Kingdom and Japan impose similar penalties for such activities, and Korea’s new regulatory regime is indeed modeled after the U.K. Market Abuse Regimes. The British authorities identified seven deadly market abuses in the Financial Services and Markets Act 2000, including insider trading, market distortion and manipulation, and other unfair practices, while seeking to punish them no longer as criminal offenses that require proof beyond reasonable doubt, but as civil ones that allow regulatory flexibility. In particular, the U.K. regulation on the abuse of nonpublic information about a listed company resembles the new ban on disruptive activities in the Korean capital markets, as its coverage is extended to users of such information outside of the company and does not require manipulative intent.

To elaborate further, the newly banned disruptive behavior is broadly divided into two types; information use and price manipulation. The regulatory crackdown on the misuse of information is set to cover everyone that is aware of secret information on a listed company, and will not require the user to be an insider. All activities that involve the use of such information or allow its use will be prohibited. The range of the information to be covered will also expand to include not just insider information of a company, but also information available in the markets but not publicly.

For example, a pension fund manager at a brokerage firm picks the listed company A as an investment and gives the information to his or her acquaintances, who in turn trade A’s stocks on such information. Under the new regime, this case might constitute misconduct.

As for price manipulation, if one engages in an activity that threatens to hamper fair pricing in the market, he or she will be subject to financial penalties regardless of the intent. For instance, phantom bids, matched orders and wash sales might be considered manipulative. This calls for a big change in trading patterns of institutional traders, retail investors and other market participants.

Therefore, it should be noted that not just executives and employees of listed companies, but also numerous market participants who generate, process and disseminate information on those companies will be subject to regulatory scrutiny from July if they are found to have engaged in any activities that disrupt the markets.

Meanwhile, some are concerned that this new regime might translate even unfair practices that ought to be sanctioned with criminal punishment into misconduct subject to only administrative penalties. To address this concern, the Financial Supervisory Service will first thoroughly check if a certain disruptive activity is one of three major offenses in the securities market, and then apply the new regulatory regime as a supplementary means in case of difficulties in finding sufficient evidence for a criminal conviction. This will serve the original purpose of the regime, which is to eliminate blind spots in the existing regulation of unfair practices.

After all, the regulation against the misuse of information is aimed at diminishing the information asymmetry between investors and leveling the playing field, while the regulation of the price manipulation type is designed to enhance investor confidence in market prices. Although the new regime might initially cause some confusion, it is expected to help ensure the integrity of the capital markets, protect investors and highlight the vitality and allure of Korea’s investment environment. And these positive effects could not be felt by market participants without their understanding and contribution.

To ensure smooth implementation of the new regime, the Financial Services Commission and the FSS have teamed up with relevant agencies such as the stock exchange to publish and distribute an explanatory document to executives and employees of listed financial companies and journalists, so that they can understand the details.

As the new regime marks a turning point in the capital market regulation, market participants should steer clear of unfair practices and activities that are disruptive in nature; listed companies and financial firms should check and reinforce their internal controls to better comply with fair disclosure regulations, while taking extra care in employee education and lawful and ethical management; and investors should discard the old practices and create a culture of investment in line with a new paradigm.

The soundness and transparency of capital markets, along with a mature investment culture, will naturally be promoted when the supervisory authority allows market participants to perform their function in compliance with the rules voluntarily, rather than interfering with their every move within a regulatory framework. Hopefully, the adoption of the new regime will help make the Korean capital markets more attractive and take Korea’s investment culture to the next level.

By Lee Dong-yeop

The writer is a senior deputy governor at the Financial Supervisory Service. The views reflected in the article are his own. He can be reached at dylee1027@fss.or.kr. ―Ed.