Korea has one of the world’s most advanced capital markets both in quantitative and qualitative terms. It is the world’s 10th largest and has been classified by the Financial Times Stock Exchange as a developed market.

The financial investment industry and the Financial Supervisory Service are working together to take the market further to the next level, especially since the Financial Investment Services and Capital Markets Act took effect in 2009. Their efforts include building a more innovative market environment that most rewards competition and autonomy, as well as protecting investors more effectively. 


The domestic and external environments facing Korea’s capital market are very challenging. At home, Korea’s growth paradigm is undergoing a shift amid low growth and population aging. Externally, uncertainties are growing in the face of the world’s sluggish economic growth and trade and fluctuating oil prices. Under such circumstances, and as the growth outlook for traditional revenue sources such as brokerage services is becoming less positive as well, there is a growing call for Korea’s financial investment industry to further improve its fundamentals and innovate itself.

In recognition of this, the FSS has been working to build a new paradigm of financial regulation and supervision that supports the “autonomy and creativity” of the industry. In a nutshell, this ongoing financial reform aims to reshape the landscape of the financial investment industry through competition and innovation, build a more competitive market, and enhance the welfare of people. And one of the precedents to the success of the reform is whether the industry has in place effective internal controls that adapt to the new environment.

However, the financial industry has yet to break completely from what it did wrong in the past. This includes mis-selling, excessive trading by employees of companies for their own account, and the misuse of information that they have obtained in the course of business. The industry sometimes lost public confidence as a result of such misconduct. While there are many factors which undermine the successful establishment of “responsible autonomy,” what matters most is that the management often considers internal controls simply as a source of costs.

Unlike general goods, the quality of consumption for financial investment products is not certain at the time of purchase, and it is highly probable that this uncertainty causes information asymmetry between suppliers and demanders until the transaction is completed. In addition, as financial investment products are increasingly complicated as a consequence of the development of financial engineering, ordinary investors are less likely to fully understand investment risks, and this makes them become more dependent on financial services companies. On the other hand, financial services companies are likely to find an incentive to encourage investors to consume excessively.

As of end-February, the outstanding issue of derivatives-linked securities came to 101.4 trillion won ($85.2 billion), nearly five times greater than 22.4 trillion won at the end of 2010. In particular, beginning in 2015, a significant portion of new issues have been concentrated in certain indices. For instance, the offering of ELS products linked to the Hang Seng China Enterprises Index have increased sharply. This is largely because financial services companies tend to communicate primarily positive information such as investment returns and thus often recommend high-return but high-risk investments.

If all the investors are completely reasonable, the regulators need not step in. However, people are not completely free from wrong decision or bias, as they often make decisions based on the rules of thumb and are not strictly logic. In short, people think within “bounded rationality.”

In recognition of this, in 2011, the Financial Services Authority, the former financial regulatory authority of the U.K., announced a product intervention approach under which it would shift its regulatory focus from the sale of products to customers and after-sale monitoring to the earlier stages of the product life cycle such as their design. The FSA also followed up with many policies to enhance effective investor protection, including the one announced in September 2012 to improve the incentive schemes of financial services companies as well as their mis-selling practices by studying how the incentive schemes affect the sale of financial products.

While banks mainly deal with principal-protected products, financial investment companies offer investments that entail a risk of loss, and it is thus crucial to earn the trust of investors. This will be better achieved, if financial investment companies work more on their own to address structural and chronic practices that lead to unsound and unlawful conduct and put investors first in every stage of the product life cycle from design to after-sale monitoring.

The three success factors for financial investment companies are people, product, and trust. The dynamic, rapidly changing financial environment requires people with the highest level of professional expertise and ethics, as well as products and services that move ahead of market trends. Finally, trust is the very foundation for financial investment companies to weather the storms from low interest rates and population aging and bring themselves to the next level. 

By Min Byung-hyun

The writer is deputy governor of the Financial Supervisory Service. The views reflected on this article are his own. He can be reached at bhmin@fss.or.kr. -- Ed.